Real Estate in Trust Administration: Selling or Transferring Property in California

Real estate is often the most valuable asset in a trust, and handling it correctly is critical to successful trust administration. Whether you need to sell property to pay expenses, distribute it to beneficiaries, or continue holding it, understanding the process, tax implications, and legal requirements is essential.

This guide covers everything California trustees need to know about dealing with real estate during trust administration.

Understanding Trust-Held Real Estate

How Property Gets Into a Trust

Real estate becomes trust property through:

1. Initial transfer - Settlor executed and recorded a deed transferring property into trust
2. Pour-over will - Property transferred to trust through probate
3. Beneficiary designation - Transfer-on-death deed naming the trust

Confirming Trust Ownership

Before taking any action, verify ownership:

1. Review recorded deed - Check county recorder's office
2. Confirm title vesting - Should show "[Trustee Name], Trustee of the [Trust Name]"
3. Get title report - Preliminary title report shows ownership and encumbrances
4. Check for mortgages - Review whether property has liens

Red flag: If property wasn't properly transferred to the trust, you may need to go through probate to gain authority over it.

Trustee Authority Over Real Estate

Review the Trust Document

The trust document governs your authority to:

Sell property:

• Can you sell without beneficiary consent?
• Are there specific directions about certain properties?
• Must you distribute property in-kind rather than sell?
• Are there timing restrictions?

Example restrictive language: "The family residence shall be offered first to my children before being sold to third parties."

California Statutory Authority

Even without specific trust provisions, California law generally grants trustees broad authority to manage trust property, including:

• Selling trust real estate (Probate Code §16220)
• Determining whether to sell or distribute in-kind
• Setting sale terms and price
• Hiring professionals (agents, appraisers)
• Making repairs and improvements

When You Need Beneficiary Consent

You may need consent if:

• Trust document specifically requires it
• You're selling property for less than fair market value
• There's a conflict of interest (you're buying the property)
• Trust is ambiguous about your authority
• Beneficiaries are entitled to specific property

When You Need Court Approval

Court approval may be required when:

• Trust document requires it
• You're selling to yourself or related party
• Beneficiaries object and you want protection
• You're uncertain about your authority
• Property sale is controversial

Step 1: Obtain a Professional Appraisal

Why Appraisals Are Critical

You need a professional appraisal for:

Tax purposes:

• Establishing date-of-death value (step-up in basis)
• Determining capital gains if property is sold
• Estate tax calculations (if applicable)
• Property tax reassessment considerations

Fiduciary protection:

• Proving you sold for fair market value
• Defending against beneficiary claims
• Documenting your prudent administration

Distribution fairness:

• Ensuring equal distributions among beneficiaries
• Establishing value if one beneficiary receives property

Appraisal Requirements

Who should appraise:

• Licensed California real estate appraiser
• Certified appraiser for high-value properties
• Someone without conflicts of interest

Date-of-death appraisal: Must establish property value as of the date the settlor died, not current value (unless you're selling).

Alternate valuation date: For estate tax purposes, you can elect to value property 6 months after death if it reduces estate tax.

What to include in appraisal:

• Property description and characteristics
• Comparable sales analysis
• Highest and best use
• Market conditions on valuation date
• Photographs
• Appraiser's certification and signature

Cost

Typical appraisal costs:

• Single-family residence: $500-$800
• Larger properties: $800-$2,000
• Commercial properties: $2,000-$10,000+

These are legitimate trust expenses paid from trust assets.

Step 2: Decide - Sell or Distribute?

Factors to Consider

Factor	Sell	Distribute
Trust directs distribution	No	Yes
Need cash for debts/taxes	Yes	No
Property is difficult to divide	Yes	No
All beneficiaries want property	No	Maybe
One beneficiary wants property	Offer to that beneficiary	Yes
Property needs major repairs	Yes	No
Market is favorable	Yes	No
Property generates income	No	Maybe

Tax Considerations

Capital gains if you sell:

• Basis = date-of-death value (stepped up from original purchase price)
• Gain = sale price minus basis minus selling costs
• Tax rate = 0%, 15%, or 20% (depending on income) plus 3.8% net investment income tax

Example:

• Original purchase price: $200,000
• Date-of-death value: $800,000 (new basis)
• Sale price: $850,000
• Selling costs: $50,000
• Taxable gain: $850,000 - $800,000 - $50,000 = $0

If you distribute instead:

• Beneficiaries receive property with stepped-up basis
• If they sell later, they pay capital gains on appreciation after death
• May be better if property will appreciate significantly

Pros and Cons of Each Option

Selling:

• Pros: Clean division, cash for distributions, no ongoing management
• Cons: Transaction costs, potential capital gains, loss of appreciating asset

Distributing:

• Pros: Beneficiaries can decide when to sell, no selling costs now, keep appreciating asset
• Cons: Harder to divide fairly, may create beneficiary disputes, ongoing management

Selling Trust Real Estate

Step 1: Prepare the Property

Make necessary repairs:

• Fix obvious problems (leaks, broken fixtures)
• Clean and declutter
• Consider staging
• Landscape improvements

Get inspections:

• Pre-sale home inspection
• Identify issues before listing
• Make required disclosures
• Protect yourself from buyer complaints

Trustee's duty: You must act reasonably to maximize sale price, but you're not required to make major improvements unless trust directs it or it's clearly prudent.

Step 2: Hire a Real Estate Agent

Selecting an agent:

• Interview 2-3 agents
• Check experience with trust sales
• Compare commission rates (typically 5-6%)
• Review marketing plans
• Check references

Agent should provide:

• Comparative market analysis (CMA)
• Marketing strategy
• Pricing recommendation
• Timeline estimate

Commission is a trust expense - paid from sale proceeds.

Step 3: List and Market

Listing agreement: Signed by you as trustee, not in your individual capacity.

Signature line should read: "[Your Name], Trustee of the [Trust Name], dated [Date]"

Disclosures required in California:

• Transfer Disclosure Statement (TDS)
• Natural Hazard Disclosure
• Lead-based paint (pre-1978 properties)
• Death on property (within 3 years)
• Preliminary title report

Trustee's duty: Make full and accurate disclosures. Failure to disclose known issues can result in personal liability.

Step 4: Review and Accept Offers

Evaluating offers:

• Price
• Contingencies (financing, inspection, appraisal)
• Closing timeline
• Buyer's qualification (pre-approval letter)
• Earnest money deposit

Multiple offers: If you receive multiple offers, document your decision-making:

• Why you selected a particular offer
• Consider price, terms, and likelihood of closing
• Protect yourself from beneficiary claims of favoritism

Countering offers: You can negotiate terms, but document your reasoning.

Step 5: Navigate Escrow

Opening escrow: Choose a reputable title/escrow company.

During escrow:

• Respond to requests promptly
• Approve inspection repairs (if agreed)
• Review preliminary title report
• Address title issues
• Obtain final beneficiary approval if required

Trust certification: Escrow will require a certification of trust showing:

• Trust existence
• Your authority as trustee
• Trust is still in effect
• Your power to sell property

Step 6: Close the Sale

At closing you'll sign:

• Grant deed transferring property to buyer
• Settlement statement (HUD-1 or ALTA)
• Affidavits and certifications
• Commission disbursement authorization

Proceeds: Sale proceeds go into the trust account, not your personal account.

Timeline: Typical escrow period is 30-45 days from acceptance.

Transferring Property to Beneficiaries

In-Kind Distribution

If you're distributing property rather than selling:

Step 1: Determine Who Gets What

If trust specifies: Follow trust instructions exactly.

If trust is silent:

• Get beneficiary agreement on who receives property
• Consider equal value distributions
• Use appraisals to ensure fairness
• Document everything in writing

Disputes: If beneficiaries can't agree, you may need to:

• Seek court instructions
• Sell property and distribute cash
• Use mediation

Step 2: Obtain Consents

Get written agreements from beneficiaries:

• Acknowledging property value
• Agreeing to distribution plan
• Waiving claims about unfairness
• Releasing you from liability

Step 3: Prepare Distribution Deed

Deed from trust to beneficiary:

Vesting options:

• Single beneficiary: "John Smith, an unmarried man"
• Multiple beneficiaries: "John Smith and Jane Smith as joint tenants" or "as tenants in common"
• Married beneficiary: Consider community property or separate property vesting

Deed must:

• Be signed by you as trustee
• Reference the trust
• Include legal description
• Include assessor's parcel number (APN)
• Be notarized

Step 4: Address Tax Reporting

Documentary transfer tax:

• Generally exempt for trust-to-beneficiary transfers
• Complete exemption form
• Varies by county

Property tax reassessment:

• Parent-to-child exclusion may apply (Prop 19)
• File claim for reassessment exclusion
• Deadline: File within 3 years or before property is transferred to third party

Form BOE-502-A (Claim for Reassessment Exclusion): Beneficiaries should file to potentially avoid property tax increase.

Step 5: Record the Deed

Recording process:

• File deed with county recorder
• Pay recording fees ($20-$50)
• Include preliminary change of ownership report
• Send copy to beneficiary

Special Situations

Property with Mortgage

Dealing with mortgaged property:

Due-on-sale clause: Most mortgages have clauses allowing lender to demand full payment upon transfer. However, federal law (Garn-St. Germain Act) provides exceptions:

Exempt transfers:

• Transfer to trust (no due-on-sale trigger)
• Transfer to beneficiary who is relative of deceased borrower
• Transfer resulting from borrower's death

Notify the lender:

• Provide death certificate
• Confirm loan will continue
• Update insurance information

Options:

1. Beneficiary assumes mortgage
2. Trust continues paying until property is sold
3. Refinance in beneficiary's name
4. Sell property and pay off loan

Rental Property

Managing rental property during administration:

Ongoing duties:

• Collect rent
• Pay mortgage, taxes, insurance
• Maintain property
• Handle tenant issues
• Keep security deposits in trust account

Selling occupied property:

• Review lease terms
• Consider tenant's rights
• May need to sell subject to existing lease
• Affects marketability and price

Distributing to beneficiaries:

• Clarify who gets security deposits
• Transfer tenant leases
• Provide tenant contact information

Property in Multiple States

Out-of-state property:

Challenges:

• Different state laws apply
• May need local counsel
• Different transfer requirements
• Ancillary probate may be necessary if property wasn't in trust

Solutions:

• Hire local real estate attorney
• Use local title company
• Understand state-specific transfer rules
• Consider tax implications in both states

Vacation Home

Emotional attachment:

Family vacation homes often create disputes:

• Multiple beneficiaries want it
• Disagreement on value
• Memories and sentiment involved
• Ongoing cost sharing issues

Options:

1. Sell and divide proceeds - Cleanest option
2. Award to one beneficiary - Must equalize with other assets
3. Transfer to all beneficiaries as co-owners - Can create future problems
4. Create LLC to hold property - Structured co-ownership

Tax Implications Summary

Capital Gains Tax

Stepped-up basis:

• Property basis = fair market value on date of death
• Gain = sale price - stepped-up basis - selling costs
• Reported on trust's Form 1041 or beneficiaries' Form 1040

Property Tax

Prop 19 (effective Feb 2021):

• Parent-child exclusion limited to primary residence + $1M value
• Base year value transfer rules changed
• File BOE-502-A for exclusion
• Must meet specific criteria

Estate Tax

Federal estate tax:

• Only applies if estate over $13.61 million (2024)
• Property included at fair market value
• Portability election may be available

Trust Income Tax

Income during administration:

• Rental income taxable to trust
• Report on Form 1041
• Consider distributing income to beneficiaries to reduce tax

Common Mistakes to Avoid

1. Not Getting Appraisal

Without proper appraisal:

• Can't prove you sold for fair value
• Don't know correct tax basis
• Can't make equal distributions
• Vulnerable to beneficiary claims

2. Selling Too Quickly

Rushing the sale can:

• Result in below-market price
• Miss better market conditions
• Violate beneficiary rights
• Trigger avoidable taxes

Take time to:

• Prepare property properly
• Market effectively
• Review multiple offers

3. Commingling Proceeds

Never:

• Deposit sale proceeds in personal account
• Mix with your personal funds
• Use proceeds for personal purposes
• "Borrow" from proceeds

Always:

• Deposit into trust account
• Keep meticulous records
• Treat as trust property

4. Failing to Disclose

Material facts you must disclose:

• Known defects
• Deaths on property
• Neighborhood issues
• Title problems
• Environmental hazards

Failure to disclose = personal liability

5. Not Documenting Decisions

Document:

• Why you chose to sell vs. distribute
• How you selected listing price
• Why you accepted particular offer
• How you determined fair distribution
• Beneficiary consents and agreements

Timeline for Real Estate Administration

Typical timeline:

Task	Timeframe
Obtain appraisal	Month 1-2
Decide sell vs. distribute	Month 2-3
Prepare property	Month 3-4
List property	Month 4
Accept offer	Month 4-5
Close escrow	Month 5-6
Distribute proceeds	Month 6-7

Total: 6-9 months for straightforward sales

Longer if:

• Market is slow
• Property needs major repairs
• Title issues arise
• Beneficiaries dispute distribution
• Property is commercial or unique

Conclusion

Handling real estate during trust administration requires careful attention to legal requirements, tax implications, and fiduciary duties. Whether you're selling property or distributing it to beneficiaries, document every decision, obtain professional appraisals, and prioritize transparency with beneficiaries.

Key takeaways:

• Get professional date-of-death appraisal
• Review trust document for specific directions
• Consider tax implications of selling vs. distributing
• Use qualified professionals (agents, attorneys, appraisers)
• Make full disclosures
• Get beneficiary consents in writing
• Keep meticulous records
• Never commingle trust funds with personal funds

Real estate transactions are often the most valuable and complex aspect of trust administration. Taking time to handle them correctly protects you from liability and ensures beneficiaries receive their full inheritance.

Related Articles

Learn more about trust property and tax issues:

• Capital Gains Tax on Trust Property Sales California - Stepped-up basis rules, capital gains calculation, tax minimization strategies, and reporting requirements for real estate sales.

• Form 1041 Trust Tax Return Guide - How to report real estate sales on trust tax returns and distributable net income considerations.

• Income vs. Principal Trust Administration - How real estate sales proceeds, rental income, and expenses are allocated between beneficiaries.

• Common Trust Administration Mistakes California - Avoid errors in real estate transactions including selling without authority and improper tax basis calculations.

• Trust Administration for Business Owners California - When trust holds business real estate, special considerations for commercial property and business use.

Need Help With Trust Real Estate?

If you're a trustee dealing with real estate in a California trust, our experienced trust administration attorneys can guide you through the process, review your authority, and ensure you're fulfilling your fiduciary duties.

Contact us for a consultation to discuss your trust property matters.

This article is for informational purposes only and does not constitute legal or tax advice. Real estate in trust administration involves complex legal and tax issues. Consult with qualified legal and tax professionals about your specific situation.