A living trust signed in 2012 was drafted for a world with a $5.12 million federal estate tax exemption, a parent-child property tax exclusion that covered rentals, and an IRA “stretch” that let a child draw an inherited account down over a lifetime. If you own a home in Redlands, Temecula, or Roseville and your trust binder has not been opened in a decade, the plan inside is still valid, but it no longer does what you think it does.
Is the property actually in the trust?
The most common failure in California trust administration is an unfunded trust. A trust only controls assets titled in the trustee’s name, and title drifts, usually at a refinance: the lender requires the house to be deeded out of the trust to close, and nobody deeds it back.
Under Probate Code § 850, a trustee or interested person can petition the probate court for an order that property held in the decedent’s individual name belongs to the trust. The petition takes its nickname from Estate of Heggstad, 16 Cal.App.4th 943 (1993), where the First District held that a settlor’s written declaration that he held listed property as trustee brought it into the trust without a deed: “a declaration by the settlor that he holds the property in trust for another, alone, is sufficient.”
The petition works best when the trust’s asset schedule lists the property, and it still means months in the Riverside or San Bernardino probate court.
What if the estate is small enough to skip probate anyway?
For deaths on or after April 1, 2025, Probate Code § 13100 lets successors collect property by affidavit when the probate estate is $208,850 or less, next adjusted April 1, 2028. AB 2016 also rewrote Probate Code § 13151 so a decedent’s California primary residence worth up to $750,000 can pass by a simplified petition rather than a full probate.
The $750,000 is gross value with no deduction for the mortgage, it covers only the primary residence, and median prices in Rancho Cucamonga and Corona already exceed it.
How did Prop 19 change what your children inherit?
Before February 16, 2021, a parent could pass any California real property to a child without reassessment. Proposition 19, implemented in Revenue and Taxation Code § 63.2, limits the exclusion to the family home (and family farm), and only if the child moves in and claims the homeowners’ exemption within one year. Even then, it covers the parent’s taxable value plus a cap the Board of Equalization sets at $1,044,586 for transfers from February 16, 2025 through February 15, 2027.
So a 2012 plan’s assumption that “the kids will keep the rental” now carries a reassessment to full market value at the parent’s death, and a review is the moment to decide whether to sell, restructure, or budget for it.
Why does an attorney-CPA care how the deed reads?
Under 26 U.S.C. § 1014(b)(6), when one spouse dies, both halves of community property receive a new basis equal to fair market value. Joint tenancy property, or one spouse’s separate property, gets a step-up on only the decedent’s share. A Yucaipa rental bought for $280,000 in 2005 and worth $620,000 today carries a $340,000 built-in gain. As community property, the survivor can sell it the next year with almost no taxable gain; as joint tenancy, roughly $170,000 of gain survives.
California lets spouses hold title as community property with right of survivorship under Civil Code § 682.1, which passes the property to the survivor without administration while preserving community character for basis.
Does the $15 million exemption mean the estate tax is over?
Pub. L. 119-21 amended 26 U.S.C. § 2010(c) to set the basic exclusion at $15,000,000 for decedents dying after 2025, indexed thereafter, and the IRS confirmed the figure in its tax year 2026 inflation adjustments. There is no sunset, and California has no estate tax.
Two cautions. Many trusts from the 2000s contain a mandatory “A-B” split written when the exemption was $1 or $2 million. At the first death that formula locks the survivor’s half into an irrevocable subtrust with its own Form 1041 and no second basis step-up, all cost and no benefit for a family under the exemption. And portability is not automatic: the survivor keeps the deceased spouse’s unused exclusion only if an executor files Form 706 and elects it. Rev. Proc. 2022-32 allows a late election up to five years after death for estates not otherwise required to file.
Are the beneficiary forms still consistent with the plan?
Retirement accounts pass by beneficiary form, and the rules changed in 2020. Under 26 U.S.C. § 401(a)(9)(H), most non-spouse beneficiaries must empty an inherited IRA within ten years. Treasury’s final regulations, effective January 1, 2025, add annual distributions in years one through nine if the owner had reached required beginning date. A 2012 “conduit” trust meant to stretch payouts over a child’s lifetime now forces the whole account out within a decade.
Divorce is the other trap. Probate Code § 6122 revokes will provisions favoring a former spouse once the marriage is dissolved, and Probate Code § 5040 does the same for revocable nonprobate transfers such as trust gifts and pay-on-death accounts. Neither reaches life insurance or a 401(k) form, and a legal separation triggers neither.
What should a Redlands couple with a 2012 trust actually do?
Take a hypothetical Redlands couple, both 72, with a June 2012 joint trust. They own their home (about $780,000), the Yucaipa rental above (assessed at roughly $340,000), and a $900,000 IRA in the husband’s name payable to the trust. Their only child lives in Dallas, and the wife’s sister, 81, is successor trustee. A 2019 refinance took the rental out of the trust and it never went back.
If the husband dies in 2027 with nothing updated, the rental sits outside the trust, so the wife needs a Heggstad petition before she can sell or refinance. The A-B split diverts half the estate into an irrevocable subtrust for no tax reason. The IRA must be emptied within ten years, if the trust even qualifies as a see-through trust. At the wife’s later death the rental is reassessed from $340,000 to $620,000 or more, nearly doubling the property tax the Dallas child pays to keep it, and the sister, then in her mid-80s, is asked to administer everything. If she declines and no one else is named, Probate Code § 15660 sends the beneficiaries to court for an appointed trustee.
A 2026 restatement fixes each item: a deed returning the rental to the trust, a disclaimer option instead of the mandatory split, an IRA form naming the child directly, retitling as community property with right of survivorship, the child as successor trustee with a professional backup, and a fresh advance health care directive on the current Probate Code § 4701 form plus a durable power of attorney naming an agent still willing to serve. Couples who moved from a common-law state such as Colorado or Oregon should add a community property agreement, since property earned there does not automatically get the double step-up.
| Life event | What to review | Timing |
|---|---|---|
| Refinance or new real property | Deed into trust; asset schedule | At closing |
| Divorce or legal separation | Trust, will, POD accounts, insurance, 401(k) forms | Immediately |
| Death of first spouse | Form 706 portability, A-B funding, basis records | Nine months; late relief to five years |
| Child moves out of state | Successor trustee, Prop 19 plan for rentals | Next review |
| Named fiduciary turns 75 | Successor and backup trustees and agents | Next review |
| Move to California | Property characterization, community property agreement | First year of residency |
Frequently Asked Questions
How often should a California living trust be reviewed?
Every three to five years, and immediately after a marriage, divorce, death of a beneficiary or fiduciary, a real estate purchase or refinance, a move into or out of California, or a major federal tax change. Trusts signed before 2021 should be reviewed now because Prop 19, the ten-year IRA rule, and the $15 million federal exemption all postdate them.
What is a Heggstad petition and when do I need one?
A Heggstad petition is a request under Probate Code § 850 asking the probate court to declare that an asset titled in a decedent’s individual name actually belongs to the decedent’s trust. It is used when property was never deeded into the trust or was deeded out during a refinance and not returned. Success usually depends on the trust’s asset schedule or a general assignment listing the property.
Does Prop 19 apply to a rental property I leave to my kids?
Yes. Since February 16, 2021, the parent-child reassessment exclusion in Revenue and Taxation Code § 63.2 covers only a family home that the child occupies as a principal residence (and a family farm). A rental, commercial building, or vacant lot is reassessed to market value when it passes to a child, however the transfer happens.
Is portability of the estate tax exemption automatic in California?
No. The surviving spouse receives the deceased spouse’s unused federal exclusion only if an executor files Form 706 and elects it, normally within nine months of death. Rev. Proc. 2022-32 permits a late election up to five years after death for estates not otherwise required to file.
Does divorce automatically remove my ex-spouse from my trust?
In most cases, yes. Probate Code § 5040 causes a revocable nonprobate transfer to a former spouse to fail once the marriage is dissolved, and Probate Code § 6122 does the same for will provisions. The statutes do not reach life insurance, federally governed retirement plans, or irrevocable transfers, and a legal separation does not trigger them, so those designations must be changed by hand.
What happens to an IRA that names an old trust as beneficiary?
If the trust qualifies as a see-through trust, the account must generally be emptied within ten years of the owner’s death under 26 U.S.C. § 401(a)(9)(H), with annual distributions in the interim if the owner had reached required beginning date. If the trust does not qualify, the payout can be compressed to five years. Trusts drafted before 2020 often lack the right language.
How North Star Law Firm Can Help
North Star Law Firm reviews and restates existing California estate plans, prepares revocable living trusts, wills, powers of attorney, and health care directives, files Heggstad petitions and handles trust administration after a death, and prepares the Form 706 and fiduciary income tax returns a plan generates. Phillip Zagotti is a California attorney and a CPA, so one review covers the deeds, the beneficiary forms, and the tax consequences together.
If your trust predates 2021, or any event in the table above has happened since it was signed, schedule a review at calendly.com/pzagotti-ca-legal/30min or through the contact page.