Inheriting a House in a Trust in California: What Happens?
Inheriting a house in a trust in California can be complcated, especially when a loved one passes away, and factoring in the intricacies of the Garn-St Germain Act. After losing a loved one, you’ll encounter a web of legal intricacies, tax headaches and jargon that can leave you feeling overwhelmed and in need of legal advice. And all this while dealing with the weight of inheriting a property from a loved one.
Our guide will clarify the process of inheriting property in a trust, covering essential steps, legal rights, tax implications, and your obligations as a beneficiary—whether you want to keep, sell, or understand your rights with the property.
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Inheriting a house in a trust in California?
Inheriting property in a trust, even inheriting a house that is paid off, can be a unique and somewhat complex experience, particularly in the state of California. When a house is held within a living trust, the process of transferring ownership and navigating the associated legalities differs from traditional inheritance.
In this guide, we’re going to take a deep dive into the world of inheriting a home within a trust in the Golden State.
What happens to a house in trust after death?
After the settlor’s decease, the trustee assumes temporary ownership of the property until its distribution to beneficiaries, even in cases of siblings contesting a trust in California which can involve probate proceedings.
For example, if the inherited property is located in San Diego, the trustee will manage it according to both state and local regulations until the final distribution. If the inherited house has a tenant, the trustee must manage the tenant’s lease until distribution.
If the settlor is also the trustee, a successor trustee takes over after their passing, formally accepting by signing an “acceptance of trusteeship.”
Next, the trustee has a 60-day window to reach out to the beneficiaries of the trust. If you’re not the trustee, anticipate receiving the following information from the trustee:
- Settlor’s name and the trust’s date
- Trustee’s contact information
- Location where the trustee will administer the trust
If you’re a beneficiary, you have the option to request a complete copy of the trust, giving you 120 days to review it, express concerns, or contest it if necessary.
Additionally, the trustee takes care of tax assessments, filing federal taxes within designated time-frames, and assessing the property’s value within 9 months after the settlor’s death. The trustee also handles outstanding debts, liens, and inheriting a house with a mortgage using the assets within the property in the trust.
Finally, as per the terms, the trustee will distribute it to the beneficiaries.
How the Garn-St Germain Act protects inherited properties with a mortgage
When inheriting a home in California through a trust, it’s important to understand the protections provided by the Garn-St Germain Depository Institutions Act.
This federal law prevents lenders from calling the full balance of a mortgage due immediately—known as enforcing a “due-on-sale” clause—when property from a trust is transferred to certain family members or into a trust upon the owner’s passing.
What the Garn-St Germain Act means for California heirs
For heirs in California, this means that if you inherit a property through a trust and there is still a mortgage on the property, you won’t be required to immediately pay off the entire loan. Instead, the loan can continue under its existing terms, allowing you to manage mortgage payments while deciding what to do with the property.
Here’s how this can work to your advantage:
- Avoid Immediate Financial Burden: You won’t need to find funds to cover the full mortgage balance upon inheriting the property. The Act allows for a smoother transition without immediate loan repayment.
- Preserve Mortgage Terms: As the inheritor, you retain the mortgage’s original interest rate and terms, potentially saving thousands in interest compared to refinancing under current rates.
- Plan Your Next Steps: Whether you decide to sell the property, refinance it, or keep it as an investment, the Garn-St Germain Act gives you the flexibility to make that choice on a timeline that works best for you.
It’s essential to review the mortgage terms and consult with an estate attorney or lawyer to fully understand your rights and obligations. The Garn-St Germain Act is a powerful protection that, when leveraged correctly, can ease the complexities of inheriting a mortgaged property in California.
What happens when you inherit a house from a trust?
Usually, the trustee can administer your inheritance within days or weeks of the settlor’s death. This means you’ve received the legal paperwork necessary for filing a deed in your name to legally acquire the house and become the owner of the property.
Once you own the home, you’ll need to:
- Evaluate the property’s condition
- Assess financial obligations – Aside from any mortgage, inheriting a property may come with existing financial responsibilities, such as property taxes, insurance, utility bills, maintenance costs, or the possibility to rent out the property and pay for any ongoing expenses from the rental income if desired. Be sure to consider whether you’re financially prepared to take on these responsibilities.
- If the property is part of an HOA, monthly dues may also apply. These additional expenses can impact your decision to keep or sell the property.
- Consider tax implications, and
- Explore your options, especially when multiple beneficiaries are involved, including scenarios where 3 siblings jointly own property together.
If selling an inherited property is your choice, there are companies that buy houses for cash, offering streamlined solutions that allow you to sell the house quickly and hassle-free. In more complex situations or disputes, legal counsel may be necessary to ensure a smooth transition.
How long can a house stay in a trust after death in California?
The Rule of Perpetuities governs how long a property can be held in trust, allowing it to last for a maximum of 21 years after the death of the last living person at the time the trust was created. However, it’s rarely applicable to most trusts due to its interpretive nature.
So, how long can a property be held in a trust after death in California? Generally speaking, the time-frame largely depends on the trust’s provisions.
On average, trusts tend to close within a year after the settlor’s passing, allowing beneficiaries to claim their inherited home in accordance with the terms.
Trustee Responsibilities and Timeline
The trustee’s role includes settling any outstanding debts, managing property taxes, and maintaining the property while it remains in the trust. In some cases, the trustee may appoint additional professionals, such as real estate agents or attorneys, to assist with the process.
The process may sometimes extend beyond a year if there are complexities, such as multiple beneficiaries, outstanding debts, or disputes over asset distribution, or the administrative complexities arising after a person’s death. Working with an experienced legal professional can help ensure that the trust closes efficiently, minimizing potential delays.
What happens if a house is left in trust?
When a house is left in trust, the outcome depends on the specific terms outlined in the trust document. However, if the trust is designed to last longer than the maximum period allowed under the 21-year Rule of Perpetuity limit, it can pose certain challenges.
In these situations, there might be a need to make changes to the trust to ensure it meets legal standards—trustees and beneficiaries would have to collaborate to handle these modifications.
On the other hand, if it’s impossible to amend the trust to meet these requirements, it may be terminated, and the property could be distributed in line with state laws or the trust’s original terms.
If you inherit a house from a trust, is it taxable?
In California, you won’t encounter an inheritance tax, which means your responsibility regarding an inherited home primarily revolves around capital gains tax on inherited property California.
However, according to the IRS, you might be liable for federal estate tax if the estate’s total value exceeds $12.92 million.
When you inherit property, whether through a trust or a will, you’re not directly taxed on the property itself, but you may have to pay taxes on capital gains if you decide to sell it later. This tax is based on the difference between the principal value of the property at the time of inheritance (known as the stepped-up basis) and the sale price.
If you’re inheriting the property as a spouse, certain tax exemptions may apply, reducing or eliminating your obligations. This means that spouses often receive more favorable tax treatment when inheriting property, including exemptions from estate taxes and potential property tax benefits. You should also contact a tax advisor to understand all available options.
If the settlor owed back taxes, the trustee addressed those obligations using other trust assets before transferring the property to you. Following the transfer, you become responsible for any new taxes associated with the house from the trust as the new homeowner.
Property Tax Reassessment Exclusion
California’s Proposition 19 law allows certain exclusions for property tax reassessment when an inherited property is used as a primary residence. This means that if you inherit a home and plan to live in it, you may qualify for an exclusion that keeps property taxes from rising to current market rates.
If, however, you plan to use the inherited home as a rental income or vacation home, you may face a reassessment, resulting in potentially higher taxes. Understanding these exclusions can help you anticipate any tax implications for your newly inherited property.
Selling a house in a trust in California
When inheriting real estate in a trust, you may be looking to sell the inheritance through a realtor. Whether it’s a California home or another type of residential property, understanding the requirements and permissions involved is crucial. If you decide to sell, you may need to create a listing as a necessity to attract potential buyers.
So, can a trustee sell trust property without all beneficiaries approving?
Yes and no.
While it’s possible to do so, the trustee is likely to face litigation in doing so, especially if there is a risk of foreclosure due to unpaid debts tied to the property.
Selling Authority of the Trustee
In California, a trustee generally has the authority to sell trust property without full beneficiary approval if the trust document grants them this right.
However, if the trust requires unanimous consent from beneficiaries, it’s important for the trustee to secure this agreement to avoid potential legal disputes. In cases where disagreements arise, involving a mediator or legal advisor can be helpful to facilitate a smooth and amicable sale process.
If you choose to work with a real estate broker when selling a trust property, they can help guide the process to ensure all legal steps are followed.
Steps to Sell a Trust-Owned Property
Fortunately, inheriting real estate in a trust and selling it can be more straightforward than you might think, especially when you have the right partner by your side.
At SoCal, we specialize in buying houses in trusts in Southern California, making it easier than working with a realtor if you prefer a direct sale..
Here’s how you can get started with us:
- Request your fair cash offer by calling 951-331-3844 or fill out the short form below.
- We’ll call you to discuss your property and schedule a one-time inspection so we can offer you the highest amount possible.
- We’ll make you a fair cash offer on your home at your inspection. If you like our offer, you can consider your home sold!
- Choose your closing date and we’ll close on the date you need. You can receive payment via check or wire transfer.
It’s that simple!
Final points on inheriting a house through a trust
Inheriting a property in trust is unlike the typical inheritance experience, especially if you’re thinking: “how do I sell my house fast in California?”, and requires careful estate planning considerations, especially if you want to sell your trust-owned property as soon as possible.
It commences with the settlor’s passing, shifting temporary oversight to the trustee. You’ll then have to navigate the legal complexities, tax considerations, property assessment, and distributing assets to beneficiaries.
While these intricacies may appear daunting, having the right guidance can make managing your inheritance property more manageable. If you opt to sell your trust-held property, SoCal Home Buyers is here to help.
Our simplified process includes a fair cash offer, flexible closing dates and no need to repair or worry about upkeep costs.
Contact us today to begin the process of selling your trust-owned property, if you want a simpler way to sell.
