Updated: Feb 24
If you are unsure about what a trust is or the basics please refer to our earlier blog here.
In order for a trust to be valid there must be property transferred to that trust. There are special considerations to take into account such as property taxes and due-on-sale clauses.
Under Revenue and Taxation Code Section 62(d) a transfer of real property to a revocable trust does NOT result in change in ownership for Prop 13 purposes and a transfer to an irrevocable trust will NOT result in change in ownership if the settlor is also the beneficiary, same if the property is transferred out of the trust and back to the settlor. This is beneficial to keep property tax low.
What is a due-on-sale clause? This clause will generally be found in your mortgage/lending documents and allows the lender to accelerate the secured obligation (i.e. money) if the debtor (i.e. settlor) transfers the ownership of the underlying asset (i.e. property). However, the Garn-St. Germain Depository Institutions Act of 1982 prohibits lenders from enforcing these clauses when the transfer is to an inter-vivos trust, the borrower is the beneficiary of the trust and remains so, and the borrower remains the occupant of the real property.
California has also implemented a similar prohibition against lenders in Civil Code Section 2924.6(a)(4), however, it does not require the borrower to remain the occupant and transfers of investment property are protected.
When transferring community property we must look at the specifics in the trust documents. As mentioned in the blog about the basics of a trust, a trust is a contract and generally dictates how property is treated. When community property is transferred into a trust it remains community property if the trust is revocable and both spouses consent to modify the trust as to the rights concerning community property. It is generally advisable to create a separate trust for separate property as it is important not to commingle with other assets.
When creating a trust, the settlor will decide which state law will govern the property. If they don’t, then with respect to real estate, the laws of the jurisdiction where the real estate is situated will govern. With respects to personal property, if no governing law is mentioned in the trust, the governing law will be the jurisdiction that has the most significant relationship to the trust, but only for an inter-vivos trust, while for a testamentary trust the governing law will be the domicile of the settlor.
But there’s also another governing law, the administration of the trust. A trust over real estate, jurisdiction will fall to the court where the real estate is located. With respect to personal property, a court of the jurisdiction where the trustee is located. This will be important if a beneficiary decides to sue a trustee for mismanagement of the trust and the trust has not designated governing law.
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