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Seven Steps to Protect the Successor Trustee (Cost is $795)
Successor Trustees to trusts owning real property need to take these seven steps to avoid personal liability and for the smooth administration, distribution and closing of the trust estate.
First, California law requires the Successor Trustee to provide written notice to beneficiaries of the trust and heirs the decedent. This notice must be provided within 60 days from date of death. Information provided is how to contact the Successor Trustee, time limit on a challenge to the trust and how to obtain a copy of the trust.
The exact requirements of this notice are found in California Probate Code Section 16061.7. A trustee who fails to serve the notification as required by Section 16061.7 on a beneficiary is responsible for all damages, attorney's fees, and costs caused by the failure.
The second step is to obtain a Federal Tax Identification Number by completing Form SS-4. After date of death the decedent’ estate becomes a separate taxable entity. State and Federal income tax returns must be filed until all assets of the estate are distributed. If the Successor Trustee distributes all the assets of the trust and a tax liability remains, the Successor Trustee may have to personally pay the tax due.
The third step is to file a "Change in Ownership Statement, Death of Real Property Owner" with the Office of the Assessor. The Successor Trustee avoids personal liability for property tax increases by putting the County on notice of change of ownership in real property due to the death of the decedent. The property tax base is adjusted to market value at date of death.
The fourth step, if needed, is for the Successor Trustee to file a "Claim for Reassessment Exclusion for Transfer Between Parent and Child" with the Office of the Assessor. Death results in a change in ownership which changes the base for property tax. The new base is the market value at date of death. California excludes the first $1 million plus the principal residence of the parents in parent-child transfers. The exclusion also applies to grandparent to grandchild transfers.
To obtain the exclusion the ‘Claim for Reassessment Exclusion for Transfer between Parent and Child’ form must be filed within three years after the date of the transfer to obtain this exclusion. Best administration practices require filing as soon as the Trustee knows the property will be transferred to children or grandchildren of the decedent.
The fifth step is for the Successor Trustee to take control of the real property. To take control the Successor Trustee must file an affidavit of death of trustee in the county where the real estate is located. The affidavit provides the Successor Trustee authority to either sell or transfer the real property.
The sixth step is an ongoing duty to keep an account and periodically provide financial reports to the beneficiaries of the trust. An accounting is needed from the date of death to the final distribution of assets of the trust. An accounting keeps beneficiaries informed and provides transparency in the administration of the trust. An accounting also provides information needed for filing federal and state tax returns for the trust.
An account shall contain the following information:
(1) A statement of receipts and disbursements of principal and income that have occurred during the last complete fiscal year of the trust or since the last account.
(2) A statement of the assets and liabilities of the trust as of the end of the last complete fiscal year of the trust or as of the end of the period covered by the account.
(3) The trustee’s compensation for the last complete fiscal year of the trust or since the last account.
(4) The agents hired by the trustee, their relationship to the trustee, if any, and their compensation, for the last complete fiscal year of the trust or since the last account.
(5) A statement that the recipient of the account may petition the court pursuant to Section 17200 to obtain a court review of the account and of the acts of the trustee.
(6) A statement that claims against the trustee for breach of trust may not be made after the expiration of three years from the date the beneficiary receives an account or report disclosing facts giving rise to the claim.
The seventh step is to administer the trust in a timely manner and maintain ongoing communication with the beneficiaries. Procrastination is the successor trustee’s biggest problem. Lack of communication is the next. Beneficiaries become more anxious and hostile as time goes on. The competency and integrity of the successor trustee is questioned. A successor trustee who does little or nothing and who fails to communicate will find himself or herself named as a defendant in a lawsuit.
How to Transfer California Real Property from Trust to Child
Two documents are needed to transfer California real property for a parent’s trust to children; affidavit of death of trustee and quit claim deed. Any real property distribution to a child of a deceased parent qualifies for Proposition 13 parent-to-child property tax exclusion.
Affidavit Death of Trustee
This document is a declaration, under oath, by the successor trustee. The successor trustee declares the owner has died and attaches a certified copy of the death certificate. The successor trustee further declares he or she is authorized to take control of the real estate property according to the terms of the trust.
The affidavit is filed with the county recorder. It is now of public record the successor trustee has the authority to take control. Control is limited to what is directed by the trust. Typically, the trust directs the successor trustee to distribute the real estate property to specified persons.
Quit Claim Deed
The second step is preparing a quit claim deed from the trust to the beneficiaries of the trust or entering into a listing agreement for the sale of the real property. If sold, the proceeds from the sale of the real property are distributed to the persons identified in the trust and quit claim deed is not needed.
A quit claim deed does not contain any implied warranties. The successor trustee who “quit claims” real estate simple conveys whatever ownership interest the trust has along with any debt or loans secured by the property. The successor trustee makes no promises and the property is taken “as is.” A quit claim is the easiest and cheapest way to transfer ownership out of a trust.
Claim for Reassessment Exclusion for Transfer between Parent and Child
Any real property distribution to a child of a deceased parent qualifies for Proposition 13 parent-to-child property tax exclusion. The parent’s property tax base for assessment is transferred to the child. But to receive the reduction in property tax the claim for reassessment exclusion must be filed within 3 years of transfer. Good practices suggest not putting this off and submitting it once the quit claim deed has been recorded.
Reduce or Eliminate Capital Gains Tax
Upon receipt and control of the real property the children should take steps to reduce taxes in the future. Good practice is to obtain an appraisal on the property as of date of parent's death. The basis to the children is the fair market value of the real property. This is a known as a step-up in basis. Capital gains tax is on the difference between sale price and the date of death market value. An appraisal is needed for any IRS audit.
Eliminate Transfer Tax
The last tax on land and real property transfers is the documentary tax. This tax currently is $1.10 per thousand dollars plus any local government additions. The California Revenue and Taxation Code Section 11930 exempts all grants, assigns, transfers or conveys that are gifts or transfers due to death. But the grant deed or quit claim deed must state under penalty of perjury on the face of the deed this exemption to avoid the documentary tax.
Duties of Successor Trustee
The Successor Trustee has additional duties other than the transfer of real property. Successor Trustees to a decedent’s trust have the duty to notify, file tax returns, prepare an accounting and distribute assets of the trust.
Successor Trustees often need to open a bank account to make deposits and pay debts of the estate. Banks will require a Federal Tax Identification Number. A tax return from the date of death to the close of the estate is needed for each year the trust has assets. The return is Form 1041 and is filed on the tax number used to open the bank account.
The Successor Trustee is required to notify heirs of the decedent and beneficiaries of the trust in a format and manner proscribed by California law. Requirements of the notice are in California Probate Code Section 16061.7. The Successor Trustee is required to notify the death to each County where the decedent owned real property. Notice is sent to the assessor’s office of the County. The notice is titled “Change in Ownership Statement Death o Real Property Owner.”
Accounting is a legal requirement. An accounting of assets and debts, income received and debts and expenses paid provides transparency and minimizes second guessing of the Successor Trustee’s actions.
"Change in Ownership Statement, Death of Real Property Owner"
For decedents in both estates and trusts the "Change in Ownership Statement, Death of Real Property Owner" is to be filed within 150 days after the date of death. Change in ownership occurs in a revocable trust on the date the trust becomes irrevocable (date of death).
Package service provided for Trust owning one real property.
Prepare and file "Claim for Reassessment Exclusion for Transfer Between Parent and Child" with the Office of the Assessor
Trust transfer (quit claim) deeds out of trust into names of beneficiaries and Preliminary Change of Ownership Report
Accounting and tax preparation services
Additional legal representation
Call 949-474-0961 or email Mark@DeedAndRecord.com for quote
Checklist of information and documents needed
To consult with an attorney call Mark W. Bidwell at 714-846-2888. For more information please go to www.BidwellLaw.com.
Trust Administration on Death of First Spouse: Funding of Bypass Trust and Survivor’s Trust
Often a trust directs on the death of the first spouse the trust is to be divided into two separate trusts, a bypass trust and a survivor’s trust. The purpose of the two trusts is to preserve the deceased spouse’s exemption from the estate tax. The estate tax is often referred to as the death tax.
Deed and Record prepares the affidavit death of first spouse and the quit claim transfer deed; prepares and files required transfer tax exemptions and records the affidavit and deed with the proper government authority.
The affidavit of death is a declaration, under oath, by the surviving spouse. The surviving spouse declares the other spouse has died and attaches a certified copy of the death certificate. The surviving spouse further declares he or she is authorized to take control of the real estate property according to the terms of the trust.
The affidavit is filed with the county recorder. It is now of public record the surviving spouse has full and sole authority to take control of the real estate property.
The second step is to prepare and record a quit claim deed to fund the Bypass Trust and Survivor’s Trust. This step requires a division of all assets owned by husband and wife. A review of the trust document, notification to heirs of the creation of the Bypass trust and division of assets is required. The services of an attorney are required at this stage.