What is a Trust Transfer Deed and Why Should I Care?
A trust transfer deed is a special type of deed. A deed is a legal instrument that transfers title of real estate, often from one person to another.
The trust transfer deed is a special type of deed that transfers title of real estate from an individual person into a trust.
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Who Owns the Property in a Trust?
To understand property ownership as it relates to the trust, you need to know the difference between the various parties to a trust. When you create a trust, you have the grantor, the trustee, and the beneficiary.
Grantor
The person creating a trust can be referred to as either the grantor, settlor, trustor, or trustmaker.
The grantor owns the assets that are transferred into the trust. Transferring an asset “into a trust” means re-titling the property in the name of the trustee.
Trustee and Beneficiaries
The trustee is a person who holds title to the trust property, on behalf of the grantor, for the benefit of the beneficiary or beneficiaries. The trustee and the grantor can be the same person, which is often the case in a revocable trust.
So even though the grantor owns the property in a trust, once that property is held in trust for one or more beneficiaries, the property interest becomes bifurcated. This means that even though the trustee holds legal title to the trust assets on behalf of the grantor, the beneficiaries of those assets have an equitable interest in the property, which is a legally enforceable right.
So if the trustee takes action that diminishes the value of the trust property, or takes other action inconsistent with the trust instructions, the beneficiaries still have a legal claim against the trustee even though they do not technically “own” the property yet.
How to Transfer Property into a Trust
In California, in order to transfer property into a trust you must change title of the asset from the grantor’s name to the trustee’s name.
Trust Transfer Deed
The type of deed required for this transfer is the trust transfer deed, which must be recorded with the county recorder’s office.
For example: If John and Mary, a married couple, buy a home and take an equal interest in the property, they might take title as “John Smith and Mary Smith, husband and wife, as joint tenants.”
If John and Mary later create a revocable trust as part of their estate planning and want their residence to be transferred into the trust, they would transfer the property into the trust via the trust transfer deed and change title to their residence as “John Smith and Mary Smith, trustees of the Smith Family Trust.”
Property Taxes and the Preliminary Change of Ownership Report (PCOR)
California property tax is 1% of the assessed value of the property, due annually on November 1st (unless paid out each month as part of your mortgage).
Anytime there is a change in ownership of real estate in California, the California State Board of Equalization will reassess your property, unless an exception applies.
Since over time the value of real estate generally goes up, it is important to avoid unnecessary tax reassessments of your property value which would cause you to pay more in taxes.
Example: if your home is initially assessed at a value of $250,000, your CA annual property tax is $2,500. If you transfer title of your home (change ownership) and the value increased to $450,000, upon the new tax assessment your property taxes will be $4,500 – that’s a $2,000 yearly increase!
Thus, in California when you transfer ownership of real estate, you are also required to file the Preliminary Change of Ownership Report (PCOR) with the county recorder’s office where the property is located.
The purpose of the PCOR is to notify the county assessor’s office of the transfer so they can determine whether to reassess the value of your property to determine a new tax rate.
Fortunately, when you transfer property you own into your trust, your property is not subject to tax reassessment. Thus, assuming the value of your property has increased, you will be exempt from paying higher property taxes after transferring your property into the trust.
Do I Have to Pay Capital Gains Tax When Using a Trust Transfer Deed to Put Real Estate into my Trust?
Capital gains tax must be paid when you have made profit on the sale of an asset.
When you transfer property into your trust via the trust transfer deed, this is a transfer of the asset and not a sale – therefore no capital gains tax will be assessed.
After real estate becomes part of the trust and is later sold, the person responsible for paying capital gains tax depends on what type of trust it is.
Keep in mind that the IRS exempts the first $250,000 (if single) and $500,000 (if married) from capital gains, whereas California taxes capital gains as ordinary income.
Generally speaking, in a revocable trust, the grantor is responsible for paying the capital gains tax. In an irrevocable trust, the capital gains is normally treated as income and taxed to the trust itself.
Note: Tax law can be complex and nuanced, and answers may vary depending on your specific situation. It is best to consult with a tax attorney or accountant to best determine your tax liability.
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Why Should I Transfer My Real Estate into a Trust?
Stay out of Probate Court with a Revocable Trust
Transferring your property into a trust can have many benefits, which are different depending on what type of trust you create.
A revocable trust is normally created in lieu of a will. With a revocable trust, you can freely transfer property into and out of the trust. After you pass away, the trust becomes irrevocable and all trust assets will be distributed to trust beneficiaries according to the trust instructions.
So your revocable trust acts as a will once you pass away, with one main difference: you won’t have to deal with probate court when your trustee administers your trust and transfers your property to your beneficiaries.
When you have a will, after you pass away it must be “probated,” which means the probate court has to authorize the person administering your will, and sometimes even individual transactions. Probate court is also quite expensive and time-consuming.
When you create a revocable trust instead, the trustee can follow your trust instructions without court involvement.
Asset Protection with an Irrevocable Trust
An irrevocable trust has less flexibility – once you transfer property into it, it generally cannot be transferred back out. Despite being less flexible than a revocable trust, an irrevocable trust may afford greater protection from creditors and may reduce your tax liability.
You should always consult an attorney to discuss the best options given your circumstances.
GET HELP WITH YOUR TRUST TRANSFER DEED
The author of this article, attorney Paul Denni, has helped many clients create their living trusts and transfer their real estate into it.
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