Selling Assets Within the Trust

I recently spoke with Vincent, a client who came to me in a panic. He’d meticulously drafted his own trust document—a common scenario, and often a brave one—but failed to fund it properly. He’d updated his Will, believing that was sufficient, and then attempted a quick sale of his rental property just weeks before a serious health diagnosis. The escrow company, understandably, froze the transaction. Vincent had signed the trust, but hadn’t legally transferred the property into it. The result? A stalled sale, a potential probate mess, and a substantial legal bill to fix the problem before it spiraled further. It was a painful, and ultimately expensive, lesson.

What Happens When a Trust Doesn’t Own the Asset?

Vincent’s case highlights a critical, often overlooked point: simply having a trust isn’t enough. Under California Probate Code § 15200, a trust is not valid unless it holds identifiable property; signing the trust document is only step one—you must legally transfer assets (funding) to the trustee for the trust to exist. If you’re selling an asset that should be held within your trust—real estate, stocks, a business interest—the title needs to reflect that ownership. Otherwise, you’re selling it as an individual, not as the trustee of your trust, potentially triggering unintended consequences.

Can I Sell Property Held in a Revocable Trust?

Yes, absolutely. As the trustee of your revocable living trust, you retain complete control over the assets held within it during your lifetime. This includes the power to sell, lease, or manage those assets just as if you owned them personally. The process is generally straightforward: you sign the sale documents as trustee, not as an individual. A proper deed will then transfer ownership to the buyer, reflecting the trust as the grantor and beneficiary. However, it’s vital to ensure the trust document grants you this authority – and almost all well-drafted trusts do.

What About Capital Gains Taxes?

As both an Estate Planning Attorney and a Certified Public Accountant with over 35 years of experience, I always consider the tax implications. Selling assets within a trust doesn’t automatically change the capital gains tax rules. You’ll still be responsible for paying capital gains taxes on any profit from the sale, based on your individual tax bracket. However, trusts offer a unique advantage: the potential for a “step-up” in basis upon your death. This means the beneficiaries inherit the assets with a new cost basis equal to the fair market value on the date of your death, potentially eliminating a significant portion of capital gains tax. This is a complex area, and proper planning is crucial to maximize tax benefits.

What if I Forgot to Transfer an Asset to My Trust?

Don’t panic. It happens more often than you think. For deaths on or after April 1, 2025, if a primary residence intended for the trust was accidentally left out (valued up to $750,000), it qualifies for a ‘Petition for Succession’ under AB 2016 (Probate Code § 13151). This is a streamlined probate process for certain smaller estates. It’s important to distinguish this from the Small Estate Affidavit which has stricter requirements. A Petition is a court order, providing more legal protection than a simple affidavit.

How Does Prop 19 Affect Trust Transfers?

California’s Prop 19 has significantly impacted estate planning, especially regarding real estate. While transferring your home into your revocable trust does not trigger reassessment, the eventual distribution to your children will trigger a Prop 19 reassessment to current market value unless the child moves in as their primary residence within one year. This is a critical consideration when planning for the future of your family home. We can discuss strategies to mitigate this impact, such as gifting strategies during your lifetime, but it requires careful analysis.

What About Business Interests Held in a Trust?

If your trust holds an LLC or other business interest, the rules surrounding beneficial ownership reporting have become increasingly complex. However, as of March 2025, domestic U.S. LLCs held in a living trust are exempt from mandatory BOI reporting. Nevertheless, trustees managing foreign-registered entities must still file updates with FinCEN within 30 days. We ensure compliance with these regulations to avoid potential penalties.

• Trust Funding: Transferring assets into your trust is as important as creating the document itself.
• Capital Gains: Understand the potential for a step-up in basis to minimize taxes for your beneficiaries.
• Prop 19: Be aware of the potential reassessment upon distribution to heirs.

How do California trustee duties and funding rules shape the outcome for beneficiaries?

Success in trust administration depends on more than just the document; it requires active management of assets, precise accounting to beneficiaries, and careful navigation of tax rules. Whether dealing with a blended family or complex real estate, understanding the mechanics of trust law is the only way to ensure the grantor’s wishes survive scrutiny.

• Protection: Review blind trusts.
• Specifics: Check probate-trust hybrids.
• Wealth: Manage dynasty trust.

A stable trust administration relies on the trustee’s ability to balance investment duties, beneficiary communication, and tax compliance. When these elements are managed proactively, families can avoid the emotional and financial drain of litigation.

Verified Authority on California Trust Law

• Trust Validity (Probate Code § 15200): California Probate Code § 15200
  The foundational statute confirming that a trust requires property to be valid. This is the legal basis for the “funding” requirement—without transferring assets (deeds, accounts) into the trust, the document is legally empty.
• Revocability Presumption (Probate Code § 15400): California Probate Code § 15400
  Confirms that California trusts are presumed revocable unless stated otherwise. This grants the settlor the flexibility to change beneficiaries, trustees, or terms as life circumstances evolve.
• Primary Residence Succession (AB 2016): California Probate Code § 13151 (Petition for Succession)
  Effective April 1, 2025, this statute acts as a backup for funding errors. If a home (up to $750,000) is left out of the trust, this Petition avoids a full probate administration.
• Property Tax Reassessment (Prop 19): California State Board of Equalization (Prop 19)
  Essential for all trust creators. While the trust avoids probate, it does not automatically avoid property tax increases for heirs. Specific planning is required to navigate the “primary residence” requirement for children.
• Estate Tax Exemption (OBBBA): IRS Estate Tax Guidelines
  Reflects the OBBBA permanent increase to a $15 million per person exemption (effective Jan 1, 2026). This shifts the planning focus for most Californians from tax avoidance to asset protection and probate avoidance.
• Digital Asset Access (RUFADAA): California Probate Code § 870 (RUFADAA)
  Without this statutory authority included in your trust, your digital legacy (crypto, social media, cloud storage) may be permanently locked away from your family by service providers.