Category: Trusts & Estates

Linda and Ray live in Redlands. Their daughter Maya is in escrow on a $700,000 house in Riverside with $35,000 saved and an 80 percent first mortgage lined up. Her parents can cover the other $105,000 from savings built during their marriage, and want it repaid so her two brothers come out even. (The family and numbers here are illustrative.)

It is the family loan I see most in California, where starter homes in Riverside, Temecula, Roseville or Rancho Cucamonga run $600,000 to $800,000.

How much interest does a California parent have to charge on a loan to a child?

At least the applicable federal rate (AFR) for the month the loan is made. IRC § 1274(d) sets three tiers: short-term up to three years, mid-term over three and up to nine, long-term beyond nine. For October 2026, Rev. Rul. 2026-19 puts them at 4.25, 4.61 and 5.22 percent compounded annually, or 4.17, 4.52 and 5.10 percent compounded monthly.

Maya’s 15-year amortizing note is long-term. At 5.10 percent, $105,000 costs her $835.81 a month, about $5,244 of it interest in year one. A nine-year mid-term note would cost $1,185.15 a month.

When does the IRS treat money from a parent as a gift?

First, on price. Dickman v. Commissioner, 465 U.S. 330 (1984), held that interest-free family loans “resulted in taxable gifts of the reasonable value of the use of the money lent,” and Congress answered with IRC § 7872. For a below-AFR gift term loan, section 7872(d)(2) fixes the gift on day one: the amount lent minus the present value of the payments. Section 7872(c)(2) ignores gift loans totaling $10,000 or less, and up to $100,000, section 7872(d)(1) caps imputed income at the borrower’s net investment income, treating $1,000 or less as zero. Married parents count as one lender under section 7872(f)(7).

Second, on substance. The Tax Court weighs the nine factors of Miller v. Commissioner, T.C. Memo. 1996-3, aff’d, 113 F.3d 1241 (9th Cir. 1997): paperwork, payments, ability to repay and tax reporting. In Estate of Bolles v. Commissioner, T.C. Memo. 2020-71, tried in San Francisco, a mother’s advances to her son were loans through 1989 and gifts once she accepted he could not repay, and the Ninth Circuit affirmed in an unpublished 2024 memorandum.

What did the Tax Court actually decide in Estate of Galli?

Barbara Galli lent her son Stephen $2.3 million in February 2013 on an unsecured note at 1.01 percent, which the note called that month’s mid-term AFR. He paid interest three times before she died on March 7, 2016. No gift tax return was filed, the estate reported the note at $1,624,000, and the IRS called the shortfall from face an unreported gift.

Judge Mark V. Holmes’s March 5, 2025 order in Docket Nos. 7003-20 and 7005-20 granted the estate summary judgment on the gift question. The IRS did not concede; it met the estate’s bank records, note and income tax returns with one declaration and lost. Under section 7872, the court said, the transfer “was not a gift at all.” Valuation was “not the subject of this motion.” The gift case closed with a stipulated no-deficiency decision on April 3, 2025, and the estate case settled with one on March 25, 2026. No judge ruled on the discount, and the order is not precedent.

Do California community property and usury rules change a family loan?

Community property does. Marital savings are community property, so both spouses are the lender, and Cal. Fam. Code § 1100(b) bars one spouse from giving community personal property away without the other’s written consent. I have both sign. The Form 709 instructions treat a community-property gift as made half by each spouse, so each parent’s $19,000 exclusion for 2026 applies with no section 2513 election. California has no gift tax on post-1982 gifts and, per the State Controller, no estate tax for deaths after 2004, so the only ceiling is the $15 million federal exclusion in Rev. Proc. 2025-32.

At the first death, Cal. Prob. Code § 100 gives the survivor half, so IRC § 2033 reaches only the decedent’s half of the note. Section 1014(b)(6) resets basis in both halves to date-of-death value. That helps with a house and hurts with a discounted note: when the survivor collects full principal, IRC § 1271(a)(1) makes the excess over basis gain. (My post on A/B trusts covers where that half goes.)

Usury is a non-issue at the AFR. Cal. Const. art. XV, § 1 caps a loan made primarily for personal, family or household purposes, which a child’s home purchase is, at 10 percent (other loans get the higher of 10 percent or 5 percent over the San Francisco Fed’s rate on advances to member banks), and parents are not exempt lenders. A 5.10 percent note is nowhere close. The risk is “fixing” an old interest-free loan with a steep rate or years of back interest, which does not undo the interest section 7872 already imputed and can cross the cap, risking forfeited interest and treble damages under Cal. Civ. Code § 1916-3.

What paperwork should a California family home loan include?

Both parents and Maya sign a written note with a fixed maturity and the rate stated as a number from that month’s ruling. Payments go from her account to theirs on schedule; in Galli, that bank trail won the motion. A deed of trust on the house gets recorded with the Riverside County Recorder, because Treas. Reg. § 1.163-10T(o) treats interest as deductible under IRC § 163(h)(3) only on debt secured by an instrument “recorded, where permitted.”

Her lender will ask where the $105,000 came from. A Fannie Mae gift letter must state “that no repayment is expected,” so it cannot cover money the family means to collect, and lying in a mortgage file violates 18 U.S.C. § 1014. Disclose the loan. The recorded deed of trust shows the lender the $105,000 is secured debt, not a disguised gift. Her parents report the interest on Schedule B, and Maya lists her parents on Schedule A, line 8b, since family lenders issue no Form 1098.

What happens to a family loan when the lending parent dies?

Treas. Reg. § 20.2031-4 presumes a note is worth unpaid principal plus accrued interest unless the executor proves the rate, maturity or another cause makes it worth less. Galli’s estate made that argument for its 1.01 percent note, and the settlement left it untested.

The rule runs both ways. The mid-term AFR was 0.38 percent in October 2020 (Rev. Rul. 2020-20) and 4.43 percent in October 2023 (Rev. Rul. 2023-18); it is 4.61 percent now. A 2020 note is worth less than face today; Maya’s is the reverse bet. If the surviving parent dies in 2031 with about $78,440 owed and similar loans priced at 3.5 percent, her 120 remaining payments are worth roughly $84,500. At 7.5 percent, about $70,400. That value matters more for equalizing siblings than for estate tax.

Parents who would rather forgive the note while alive can forgive up to $38,000 a year under the annual exclusion. The risk is a prearranged plan: under Rev. Rul. 77-299, the IRS treats a note the lender always meant to forgive as a gift of the full amount on day one. Make each forgiveness a separate written decision after the payment comes due.

Otherwise the note sits in the parents’ revocable trust, and the trust should carry instructions. Cal. Prob. Code § 21135 charges a lifetime gift against an at-death share only if the instrument or a writing by the parent or child says so, and section 6409 sets the same rule for advancements in intestacy. A loan is not a gift, so absent a clause the trustee simply holds a receivable from a beneficiary. Section 16000 binds the trustee to the instrument, and sections 16003 and 16010 add impartiality between Maya and her brothers and a duty to take reasonable steps to collect. I draft the trust to say whether the balance is forgiven or offset against her share, and at balance or appraised value, much as Mary Bolles’s trust reduced each child’s share by loans plus interest.

Frequently Asked Questions

Can I lend my child money interest-free in California?

Yes, but federal law imputes interest at the AFR unless an exception applies. Gift loans totaling $10,000 or less are ignored, and up to $100,000 the imputed income is limited to the child’s net investment income.

Is the October 2026 AFR locked in for the whole loan?

For a term loan, yes. A 15-year note signed in October 2026 keeps the 5.22 percent long-term rate, or its monthly equivalent, for its life. A demand loan floats with the short-term rate.

Can my child deduct interest paid on a family home loan?

Only if a recorded deed of trust secures the note and your child itemizes. The interest goes on Schedule A, line 8b, with your name, Social Security number and address.

Do we have to tell the mortgage lender that part of the down payment is a loan?

Yes. A gift letter must say no repayment is expected, so it cannot cover money you plan to collect. Disclose the loan and expect the lender to count the payment.

What happens to the loan if I die before my child repays it?

The balance is an asset of your estate or trust at fair market value, and with community property only your half is in your estate. Your trust should say whether the balance is forgiven or charged against that child’s share.

How North Star Law Firm Can Help

North Star Law Firm drafts family notes and matching revocable living trust clauses, and it advises trustees on collecting or offsetting family loans in trust administration and on the trust and estate tax returns that follow. Phillip Zagotti is a California attorney and a CPA admitted to the U.S. Tax Court.

If you are about to fund a child’s down payment, contact North Star Law Firm or schedule a consultation before escrow closes.

Picture a Temecula couple fifteen years into a marriage. Her late father’s trust sends her a check every quarter, and the week the petition is served, her husband asks whether half of it is his. In California the answer is usually no, but what she did with the checks can matter more than anything the trust says.

Equitable-distribution states let a judge weigh a trust interest in a fair overall split. California does not, and the money moves through tracing claims and support orders instead. Here is how that works, with the records I pull first as a CPA who does forensic work.

Is a trust from my spouse’s parents community property in a California divorce?

Generally not. Cal. Fam. Code § 760 makes property acquired during marriage community “except as otherwise provided by statute,” and section 770 is the big exception: property acquired “by gift, bequest, devise, or descent” is separate, along with “the rents, issues, and profits” of it. An interest in a parent’s trust arrives by gift or at death, so it belongs to the beneficiary spouse, and the court’s duty under section 2550 is to divide the community estate equally.

The income stays separate too. IRS Publication 555 notes that Idaho, Louisiana, Texas and Wisconsin treat income from most separate property as community income; California does not. After the date of separation, section 771 also makes each spouse’s earnings and accumulations separate.

What happens when trust distributions go into our joint account?

Purchases from a mixed account are presumed community. In re Marriage of Mix, 14 Cal. 3d 604 (1975), repeated that mixing “does not destroy the character of the former if the amount thereof can be ascertained” and approved two proofs: direct tracing of a separate deposit to a specific withdrawal, and the family expense method, which rests on “the presumption that family expenses are paid from community funds.” If household costs had used up the community income when the asset was bought, what remained was separate.

The burden sits with the spouse claiming separate property. See v. See, 64 Cal. 2d 778 (1966), said a spouse who commingles “assumes the burden of keeping records adequate,” and treated separate money spent on family living costs as a gift to the community. In In re Marriage of Frick, 181 Cal. App. 3d 997 (1986), “evidence of only an isolated portion of the account’s activity” was not enough.

Down payments get their own rule. A house in joint title is presumed community under Fam. Code § 2581, but section 2640 reimburses traced separate contributions to the purchase, absent a written waiver, “without interest or adjustment for change in monetary values.” Appreciation stays with the community.

How does a forensic accountant trace trust money in a California divorce?

I start on the trust’s side. Cal. Prob. Code § 16062 requires the trustee to account at least annually to beneficiaries eligible for current distributions (the steps for an uncooperative trustee are in my post on California accounting rules). The accountings date every distribution and the K-1s show what was reported as income. Each distribution then gets matched to a deposit, and each deposit to what followed it.

In Mix, a schedule the wife built with her accountant was “wholly inadequate” by itself because it was not tied to any bank account; her testimony saved it. I would not plan a case around that. If inherited money bought a business the beneficiary spouse runs full time, the growth gets apportioned. Pereira v. Pereira, 156 Cal. 1 (1909), gives the separate capital a fair return and the rest to the community; Van Camp v. Van Camp, 53 Cal. App. 17 (1921), keeps profits separate when the spouse drew a fair salary.

Can a spendthrift trust be reached for child or spousal support in California?

Yes. A spendthrift clause shields trust money “until paid to the beneficiary” under Prob. Code § 15300, but support is different. Section 15305 lets the court order the trustee to pay a support judgment for a spouse, former spouse or minor child, even from future discretionary payments, “notwithstanding any provision in the trust instrument.” Ventura County Dept. of Child Support Services v. Brown, 117 Cal. App. 4th 144 (2004), upheld an order making a discretionary trust’s trustee pay child support directly. Ordinary creditors suing under section 15306.5 are capped at 25 percent of each payment, behind any support order, and a trust a spouse creates for himself gets no spendthrift protection under section 15304.

Support is calculated apart from the property division. Fam. Code § 4058(a)(1) counts “trust income” as gross income for child support. County of Kern v. Castle, 75 Cal. App. 4th 1442 (1999), held an inheritance is not income but can be weighed through the drop in living expenses, and In re Marriage of Alter, 171 Cal. App. 4th 718 (2009), lets recurring gifts count. For spousal support, section 4320 looks at “earned and unearned income” and assets “including the separate property.” Ten years of identical payments look like income, whatever the discretion clause says.

What happens to our joint living trust when we separate?

A revocable trust does not change community property’s character. Under Fam. Code § 761, it stays community, and unless the instrument says otherwise either spouse can revoke as to it. Its assets are divided like any others.

Mid-case changes are restricted. The automatic restraining orders in section 2040 bar modifying a nonprobate transfer without consent or a court order, though a spouse may revoke a revocable trust after filing and serving notice. After judgment, Prob. Code § 6122 revokes will gifts to a former spouse and section 5040 makes most revocable nonprobate transfers to one fail, as the notice required by Fam. Code § 2024 warns. I still restate the trust after judgment.

Division is usually tax neutral: 26 U.S.C. § 1041 recognizes no gain on transfers between spouses incident to divorce, and Cal. Rev. & Tax. Code § 63 keeps a transfer under a dissolution decree from triggering reassessment.

Can my spouse move money into an irrevocable trust before filing for divorce?

Not safely. Spouses are fiduciaries under Fam. Code § 721, and section 1100 bars giving away community personal property without written consent. Under section 1101, a transfer in breach costs 50 percent of the asset plus fees, or 100 percent when the conduct is fraud, oppression or malice. In In re Marriage of Rossi, 90 Cal. App. 4th 34 (2001), a wife who hid lottery winnings lost all of them. A transfer meant to hinder a creditor is also voidable under Cal. Civ. Code § 3439.04, and a trust quietly funded before filing, with the transferor as trustee, fits that pattern.

How would this play out for a Redlands couple?

An illustrative case: Daniel and Erin married in 2012 and live in Redlands. Daniel’s mother died in March 2021, leaving a spendthrift trust that pays him $40,000 a year. He saved two years of checks in his own account, then in 2023 wired $60,000 toward the down payment on a house titled to both. Later checks went into the joint account that took both paychecks. They separated in March 2026 with $18,000 in it.

The trust stays Daniel’s. If the wire and the trustee’s accountings tie the $60,000 to distributions, section 2640 returns it to him before the equity is split, while appreciation stays community. The $18,000 is the real fight: Daniel must trace it under Mix, and distributions spent on groceries are gone under See v. See.

The $40,000 counts as income for child and spousal support, and section 15305 lets the court send a support order to the trustee if Daniel stops cashing checks. The K-1 carries the trust’s taxable income out to Daniel as it distributes under 26 U.S.C. § 662, and it is all his to report, before separation too. Had the trust instead given him his mother’s home under the Proposition 19 parent-child exclusion in Rev. & Tax. Code § 63.2, moving out in the divorce could end that exclusion once he no longer qualifies for the homeowners’ exemption.

Frequently Asked Questions

Does my spouse get half of my inheritance in a California divorce?

No. An inheritance and its income are separate property under Family Code section 770. What can be lost is inherited money mixed into joint accounts that you cannot trace.

Can my former spouse collect child support from my trust?

Often, yes. Probate Code section 15305 lets a court order the trustee to pay a support judgment despite a spendthrift clause, including from future discretionary payments. Trust income also counts toward guideline child support.

Can we change our living trust after one of us files for divorce?

Not freely. The automatic restraining orders bar modifying nonprobate transfers without consent or a court order, though a spouse may revoke a revocable trust after filing and serving notice. Restate the trust after judgment.

What records prove that money came from a family trust?

The trustee’s annual accountings and the trust’s K-1s, plus statements for every account the money passed through. A summary schedule alone may fall short.

Are trust distributions taxed to both spouses while we are still married?

Not in California. Income from separate property belongs to the spouse who owns it, so the beneficiary reports it. Community income such as wages is split until the community ends.

How North Star Law Firm Can Help

North Star Law Firm works alongside family law counsel on the trust tracing and tax questions in California divorces, drawing on its trust administration, revocable living trust and trust and estate tax return practices. Phillip Zagotti is a California attorney and a CPA with a forensic accounting background, admitted to the U.S. Tax Court.

If a trust is part of your separation, contact North Star Law Firm or schedule a consultation while the records are still easy to get.

Paul is the trustee of an irrevocable trust his mother signed in 2004 and funded with a rental house in Corona. She died in 2019. The trust hands each grandchild a share outright at 25, and one grandchild now receives SSI and Medi-Cal. A six-figure check could cost him both. The document says it cannot be amended, and the woman who signed it is gone.

National articles usually assume the Uniform Trust Code and its nonjudicial settlement agreements. California never adopted the UTC, and its own tools carry different costs.

Can beneficiaries change an irrevocable trust in California without a judge?

Only if the person who created the trust is alive and joins in. Since January 1, 2018, Cal. Prob. Code § 15404(a) has allowed modification or termination “by the written consent of the settlor and all beneficiaries without court approval.”

Once the settlor has died, the route is section 15403, which always requires a petition. Even with unanimous consent, the court can refuse if the trust still serves “a material purpose” that outweighs the reason for the change. A spendthrift clause matters less than people assume: section 15403(b) uses it to block termination without good cause, not modification.

Minors and unborn grandchildren cannot sign. Section 15405 lets a guardian ad litem appointed under section 1003 consent for them in court. Since January 1, 2026, AB 565’s rewritten section 15804 also allows UTC-style virtual representation: a parent may bind minor and later-born children, and someone with a substantially identical interest may bind others, absent a conflict of interest. A settlor can never represent a beneficiary on modifying an irrevocable trust.

Can a California trustee decant a trust instead of going to court?

Often, yes. California’s version of the uniform decanting act, Cal. Prob. Code §§ 19501 to 19530, took effect in 2019 and reaches older trusts. The trustee moves assets into a second trust with better terms. Section 19507 requires no consent or court order, only notice at least 60 days ahead to the qualified beneficiaries and others, with a bold warning to contest within 59 days, though section 19507(i) keeps a later abuse-of-discretion challenge alive.

A trustee whose principal discretion is not tied to health, education, support or maintenance decants under section 19511 but cannot add beneficiaries or cut a vested interest. A trustee bound by that standard falls under section 19512, which keeps each interest “substantially similar.” (My post on bypass trusts and the $15 million exemption covers decanting for basis step-up.)

Only a settlor is barred from decanting, so a beneficiary-trustee qualifies, but section 16081(c) usually caps that trustee’s discretion over his own distributions at the same standard. The exception that matters for Paul is section 19513, which lets a trustee move a disabled beneficiary’s interest into a special needs trust as if he had expanded discretion, if that furthers the trust’s purposes. A spendthrift clause does not block decanting under section 19515(c); an express prohibition does.

When will a California court change a trust because circumstances changed?

Section 15409 lets a trustee or beneficiary petition, through section 17200(b)(13), to change administrative or dispositive terms when, “owing to circumstances not known to the settlor and not anticipated by the settlor,” the trust as written would defeat or substantially impair its purposes. No one else has to agree. In Stewart v. Towse, 203 Cal. App. 3d 425, 428 (1988), a surviving spouse sought to replace the successor trustee of irrevocable B and C trusts, and the court confirmed the long-standing “equity power to modify the terms of a trust” to preserve it or serve the trustor’s intent. The evidence must show what changed and why the settlor could not have foreseen it.

Does a trust protector clause work under California law?

Yes, but only through the document. I have not found a California statute defining a protector’s powers or duties, or a published California appellate decision on the role; the decanting act uses “protector” only for whoever enforces a pet trust (section 19523). Still, section 19503(d) preserves another person’s power to modify a trust “under the trust instrument.” Whether a protector owes fiduciary duties is unsettled, so I spell out the standard of conduct when I draft one.

Which trust changes cause gift, GST or property tax problems?

Gift tax can fall on beneficiaries. In Chief Counsel Advice 202352018 (Dec. 29, 2023), beneficiaries consented to a court modification adding a power to reimburse the grantor’s income tax, and the IRS called it a taxable gift by them. It said silence after statutory notice and a right to object gives the same answer, which resembles California decanting. The memo is not precedent. IRS Notice 2011-101 sought comments on decanting; I have found no guidance since.

For GST-exempt trusts, Treas. Reg. § 26.2601-1(b)(4) shelters a decanting only if the document or state law allowed it when the trust became irrevocable, and California had no decanting statute before 2019. Other modifications pass if they neither shift an interest to a lower generation nor delay vesting. These rules address trusts irrevocable by September 25, 1985; for trusts exempt by allocation, I apply them because nothing else is written. Section 19519 lets decanting switch grantor-trust status, subject in some cases to a living settlor’s written objection.

Real property adds a California risk. Property Tax Rule 462.160 finds a change in ownership “to the extent that persons other than the trustor-transferor are or become present beneficiaries,” and BOE Annotation 220.0821 applies that to sprinkle powers reaching anyone without an exclusion. Cal. Rev. & Tax. Code § 62(d) protects a transfer into trust only while the trustor is the present beneficiary or the trust is revocable. After Prop 19, section 63.2 excludes only a principal residence or family farm, so adding a grandchild as a current beneficiary of a rental usually means reassessment.

How would a Riverside County family fix a 2004 trust?

Back to Paul, with illustrative numbers: his mother, Evelyn, put the Corona rental (worth about $900,000, assessed near $310,000) and a $700,000 brokerage account in the trust. Paul and his sister Dana each take half the income for life, Paul may pay principal for health and support, and each half then passes to that child’s children at 25. Dana’s son Marco, born in 2007, has a developmental disability. Dana has a 16-year-old and Paul a 12-year-old. Evelyn allocated GST exemption in 2004.

A section 15403 petition in Riverside County Superior Court needs Paul, Dana, Marco if he has capacity, and someone to bind the minors and unborn grandchildren. Section 15804 probably lets the parents do it, but I would budget for a guardian ad litem: perhaps four to eight months and $10,000 to $25,000. Under section 19513, Paul gives 60 days’ notice and decants Dana’s half into a second trust that holds Marco’s eventual share in a third-party special needs trust, roughly three to four months and $6,000 to $12,000. A section 15409 petition works because Marco was not born when Evelyn signed; uncontested, figure five to nine months and $12,000 to $30,000. These are my estimates, not quotes.

The cautious choice is to decant and then ask the court to approve it under section 19509(a)(3), pleading section 15409 in the alternative. The order shuts the door section 19507(i) leaves open and, under section 15804(d), binds represented beneficiaries. Watch the language for Marco’s death. If his remainder newly passes to his own children, value shifts down a generation and fails the GST test; a testamentary general power of appointment for Marco is one common fix, and it keeps any gift by him incomplete under Treas. Reg. § 25.2511-2(b). No one becomes a present beneficiary of the house, so no reassessment; a sprinkle power over rent for the grandchildren would have exposed part of the $590,000 gap between value and assessment.

Frequently Asked Questions

Can we change our parents’ irrevocable trust after they die in California?

Not by private agreement alone. With the settlors gone, beneficiaries need a court order under Probate Code section 15403 or 15409, or the trustee may be able to decant. The route depends on whether everyone agrees and on the trustee’s powers.

Does a spendthrift clause stop a California trust from being modified?

Not by itself. Under section 15403 it bars termination unless the court finds good cause, and in a changed-circumstances petition it is only a factor. Decanting is allowed despite a spendthrift clause unless the document expressly prohibits decanting.

How long does decanting take in California?

Notice must go out at least 60 days before the trustee acts, unless everyone entitled to notice signs a waiver. Drafting adds a few weeks, and court approval adds the wait for a probate hearing.

Who signs for minor or unborn beneficiaries in California?

Since January 1, 2026, Probate Code section 15804 lets a parent represent minor and later-born children if there is no conflict of interest. A court-appointed guardian ad litem remains available and is safer when the parent’s own interest is affected.

Will changing an irrevocable trust raise the property tax on a California house?

It can. Making someone without an exclusion a present beneficiary, such as a grandchild whose parent is living, may reassess that share. Administrative changes that keep the same present beneficiaries usually do not.

How North Star Law Firm Can Help

North Star Law Firm handles modification petitions and decanting for California trustees and beneficiaries through its trust administration practice, drafts protector and decanting terms into new revocable living trusts, and prepares the resulting trust and estate tax returns. Phillip Zagotti is a California attorney and a CPA, admitted to the U.S. Tax Court, and co-author of Trusted: The Essential Guide for Trustees.

If an older trust no longer fits your family, contact North Star Law Firm or schedule a consultation before anyone signs a consent or sends a decanting notice.

Many trusts I review for Riverside and Roseville couples date from 2008, when the federal exemption from estate tax was $2 million. Most contain an A/B formula that, at the first death, sends the largest amount that can pass tax free into a "bypass" or "credit shelter" trust. Section 70106 of Pub. L. 119-21 rewrote 26 U.S.C. § 2010(c)(3) so the basic exclusion amount is $15,000,000 for 2026, indexed after 2026, with no sunset. Rev. Proc. 2025-32 confirms it. As of October 2, 2026 the IRS has not published the 2027 figure.

Should the formula come out? For most California couples well under $30 million I lean toward yes, though the tools depend on whether both spouses are alive. For a broader plan review, see our post on updating a California estate plan after Prop 19.

What does a mandatory bypass formula do when the first spouse dies?

The survivor’s share stays in her revocable trust. With a $15 million exemption, the formula sweeps the deceased spouse’s entire share into the B trust, which becomes irrevocable at death. The survivor usually gets income plus principal for her health and support, and the children take the remainder. Within 60 days the trustee must serve the notice required by Cal. Prob. Code § 16061.7. The survivor can no longer change who inherits that share.

Why does the bypass trust cost the children a second step-up in basis?

Under 26 U.S.C. § 1014, inherited property takes a basis equal to its value at death. Section 1014(b)(6) adds a California bonus: the survivor’s half of community property is also stepped up at the first death.

The bypass trust is built to stay out of the survivor’s estate, so it misses the second step-up. Her own assets are stepped up again when she dies, and so is QTIP marital trust property, because 26 U.S.C. § 2044 pulls it into her estate and section 1014(b)(10) resets its basis. The B trust gets nothing, and on a rental its depreciation stays baked in.

What does a funded bypass trust cost to run each year?

A funded B trust files its own Form 1041 and California Form 541. For 2026 a trust hits the 37 percent federal bracket above $16,000 of taxable income. 26 U.S.C. § 1411(a)(2) adds 3.8 percent on undistributed investment income above that line.

California is different. Cal. Rev. & Tax. Code § 17041(e) uses the single-filer schedule for trusts, so the state side is not compressed. The FTB’s 2025 Form 541 rate schedule starts 9.3 percent at $72,724 and 12.3 percent above $742,953, and under section 17742 the trust is taxable here if a trustee or noncontingent beneficiary lives here. The survivor-trustee also owes the children the duty under Prob. Code § 16060 to keep them reasonably informed.

When does a bypass trust still earn its keep?

Second marriages are the classic case, though a QTIP trust protects the first spouse’s children just as well and keeps the step-up. Generation-skipping planning is another. The GST exemption under 26 U.S.C. § 2631(c) equals the basic exclusion amount but is not portable, so the first spouse must use it at death, through a bypass trust or a reverse QTIP election under section 2652(a)(3). A spendthrift B trust under Prob. Code § 15300 also sits beyond the survivor’s future creditors and a new spouse.

On Medi-Cal, Welf. & Inst. Code § 14009.5 limits estate recovery to the probate estate and bars it while a spouse survives. Eligibility is different: DHCS reinstated an asset limit ($130,000 for one person) on January 1, 2026 and says it falls to $21,000 on July 1, 2027. Whether a bypass trust created through a living trust counts against the survivor turns on 42 U.S.C. § 1396p(d)(2)(A), which carves out trusts a spouse created by will (see our Medi-Cal planning page). A child living in Washington (about a $3 million exclusion) or Oregon ($1 million threshold) may owe that state’s estate tax at death on an outright inheritance. A continuing trust for that child can avoid it, even if the bypass formula goes.

How do portability and Form 706 fit in?

Without a B trust, portability is the backstop. The executor elects it under section 2010(c)(5)(A) on a timely return, due nine months after death under 26 U.S.C. § 6075(a) plus any extension. Rev. Proc. 2022-32 allows a late election up to the fifth anniversary of death for estates not otherwise required to file. The ported amount is not indexed, and the return must be complete, as our Estate of Rowland post explains. A Clayton plan always needs a Form 706 for the QTIP election, and Rev. Proc. 2016-49 keeps the IRS from voiding an unneeded QTIP election when portability is elected.

How do the numbers work for a Riverside couple with a 2008 A/B trust?

Take Dan and Laura, an illustrative Riverside couple with a 2008 A/B trust, a $1.9 million house and a $900,000 rental, all community property. Assume Dan dies in 2027 and Laura in 2037, when the house is worth $2.5 million and the rental $1.2 million.

Under the formula, Dan’s $1.4 million half funds the B trust, and section 1014(b)(6) steps all $2.8 million up at his death. At Laura’s death only her half is stepped up again. The B trust’s half of the house has a $950,000 basis against $1.25 million; its half of the rental has $450,000, less about $80,000 of depreciation, against $600,000. That is roughly $530,000 of gain, and at 15 percent federal plus 9.3 percent California the children owe about $129,000 if they sell, more if unrecaptured section 1250 gain applies.

With a full Clayton QTIP election, or a disclaimer plan where Laura disclaims nothing, all $3.7 million is stepped up at her death. Estate tax is zero under every design, and property tax does not change. Funding the B trust is excluded under Rev. & Tax. Code § 63, and the children’s change in ownership occurs at Laura’s death under Property Tax Rule 462.160(c). Section 63.2 shelters the house only if a child moves in within a year, and only up to the factored base year value plus $1,044,586 through February 15, 2027 (BOE LTA 2025/009). The rental is reassessed either way.

How do we change the trust while both spouses are living?

By amendment. Cal. Prob. Code § 15401 allows revocation by the trust’s method or, unless that method is exclusive, a signed writing delivered to the trustee, and section 15402 allows modification by the same procedure. Under Fam. Code § 761, community property keeps its character when modification requires both spouses, so both of you sign. If one spouse lacks capacity, a conservator can seek authority under Prob. Code § 2580(b)(11).

A disclaimer plan leaves everything to the survivor, who has nine months to disclaim part into a bypass trust under 26 U.S.C. § 2518 and Prob. Code § 275; under Treas. Reg. § 25.2518-2(e)(2) she may keep income and support-limited principal from that share. A Clayton plan, named for Estate of Clayton v. Commissioner, 976 F.2d 1486 (5th Cir. 1992) and now reflected in Treas. Reg. § 20.2056(b)-7(d)(3)(i), gives the survivor a QTIP interest in whatever the executor elects; the rest goes to a bypass trust. For blended families I like that the executor, not the survivor, decides.

What if the first spouse has already died?

Then the B trust is irrevocable. Section 15404 needs the settlor’s consent, which a deceased settlor cannot give. Under section 15403 all beneficiaries can petition, but the court must find the reason outweighs any remaining material purpose. Section 15409 requires unanticipated circumstances that would defeat or substantially impair the trust’s purposes, a hard fit for a lost step-up. Both are brought by petition under Prob. Code § 17200(b)(13).

Decanting under the Uniform Trust Decanting Act, Prob. Code § 19501 and following, can work. A trustee bound by a health and support standard has only "limited distributive discretion" under section 19512 and must keep the new trust substantially similar. An independent trustee with broader discretion can, under section 19511(d) and (e), give the survivor a general power of appointment, pulling the assets into her estate under 26 U.S.C. § 2041 and restoring the step-up, after 60 days’ notice under section 19507.

Frequently Asked Questions

Is our old A/B trust invalid now that the exemption is $15 million?

No. The trust and its formula still work. With a $15 million exemption, though, it will usually push the entire share of the first spouse to die into the bypass trust, which may not be what you want. Whether to change it depends on your family and your real estate’s appreciation.

Can the surviving spouse skip funding the bypass trust?

Not safely. Once the first spouse dies, the B trust is irrevocable and the trustee must fund and administer it under its terms. Leaving it unfunded invites disputes with the children and personal liability for the trustee. If it no longer makes sense, petition the court or decant; do not ignore it.

Does switching to a disclaimer or Clayton plan change our property taxes?

Generally no. A transfer to a trust for a surviving spouse is excluded from reassessment under Revenue and Taxation Code section 63. When the survivor dies, the family home is tested under section 63.2 and rental property is reassessed under any design. The choice mainly changes income tax basis.

Do we need to file Form 706 if our estate is far below $15 million?

Not for estate tax, but often for portability, which lets the survivor keep the deceased spouse’s unused exclusion. Rev. Proc. 2022-32 allows a late portability election up to five years after death for estates not required to file. A Clayton plan needs one regardless.

What will the estate tax exemption be in 2027?

The IRS had not announced it as of October 2, 2026. The statute sets $15,000,000 for 2026 and indexes it for deaths after 2026, rounded to the nearest $10,000. The IRS usually publishes the next year’s figure in a fall revenue procedure, so check before relying on a projection.

How North Star Law Firm Can Help

North Star Law Firm reviews and amends older A/B trusts for married couples in the Inland Empire, the Sacramento area and across California, including conversions to disclaimer and Clayton designs within revocable living trusts, trust administration after a first death, and the Form 706, 1041 and 541 filings handled through our trust and estate tax return practice. Phillip Zagotti is a California attorney and a CPA who models the basis and income tax results before recommending a change.

If your trust was signed before the exemption reached $15 million, contact North Star Law Firm or schedule a consultation to see whether the bypass formula still fits.

Your mother died in the spring. Your brother is the trustee. By late summer nobody has sent you the trust or a single statement, and every question gets “I’m handling it.”

California does not leave that to the trustee’s mood. The Probate Code requires written notice within 60 days after a trust becomes irrevocable and a yearly account after that, with the trust terms available on request. A trustee who stonewalls can be ordered to comply or removed, and the same statutes tell a new successor trustee what to send and when.

What does a California trustee have to send beneficiaries, and by when?

The baseline is Cal. Prob. Code § 16060: the trustee “has a duty to keep the beneficiaries of the trust reasonably informed of the trust and its administration.” Section 16060.7 adds the trust terms on request and section 16061 adds information “relevant to the beneficiary’s interest” on reasonable request. A settlor cannot waive either one (section 16068).

Under section 16061.7, when a settlor’s death makes a trust irrevocable, or an irrevocable trust changes trustees, the trustee must serve a “notification by trustee” on each beneficiary and, after a death, each heir, usually by mail under section 1215. It identifies the settlor, the trust date, the trustees and their contact details, and where the trust is administered, and offers a copy of the terms.

The deadline is 60 days after the event, but if the event created a vacancy, the 60 days start when the new trustee begins serving. A death notice must also warn in boldface of the contest deadline in section 16061.8: 120 days after service, or 60 days after the terms are delivered within that window, if later. A trustee who fails to serve owes the resulting fees and damages under section 16061.9.

Do discretionary and remainder beneficiaries get the same information?

On information, mostly yes. Probate Code § 24 treats anyone with “any present or future interest, vested or contingent” as a beneficiary, so a contingent grandchild still gets notice and information. The annual account under section 16062(a) is narrower, running to beneficiaries to whom income or principal “is required or authorized in the trustee’s discretion to be currently distributed.” That includes a discretionary current beneficiary, but usually not a remainder beneficiary behind a spouse’s life interest.

While a trust is revocable and someone who can revoke it is competent, section 15800(a) gives the beneficiary’s rights to that person, and section 16069 excuses reporting to anyone else. Under the incapacity rule reworked by AB 1079 (Stats. 2021, ch. 749), once the last person able to revoke is shown incompetent, the trustee has 60 days to send the instrument to the beneficiaries who would take at death, and owes them accounts.

Estate of Giraldin, 55 Cal.4th 1058 (2012), held that after the settlor dies, beneficiaries may sue for breach of the duty the trustee owed the settlor, to the extent it harmed them. Babbitt v. Superior Court, 246 Cal.App.4th 1135 (2016), barred an order making a widow account for the years before her husband died, because the couple were themselves the settlors and trustees.

What does a California trust account have to show, and how does a CPA test it?

Section 16063 requires receipts and disbursements of principal and income, ending assets and liabilities, the trustee’s compensation, and the agents hired with their pay and any relationship to the trustee. It must also flag the right to court review under section 17200 and the three-year bar on breach claims, which section 16460 starts only when the account discloses the problem. Even if the instrument waives accounts, section 16064 lets a court compel one when a material breach is reasonably likely.

An irrevocable trust generally files a federal Form 1041 and, once gross income passes $10,000 or net income passes $100, a California Form 541, with a Schedule K-1 to each beneficiary receiving a distribution or allocation. Returns and account come from the same books. Dividends on the 1041 exceeding income on the account mean something is missing, and a K-1 allocating income to you that never reached your bank raises the question of where it went.

I also match the fiduciary fee deduction to the account’s compensation line, then read the general ledger, where checks to the trustee’s own business surface long before they distort a total.

How does a trustee change happen correctly in California?

Section 15640 allows resignation only as the instrument provides, with consent of whoever can revoke, with consent of all adult current and termination beneficiaries once irrevocable, or by court order. Section 15641 keeps the resigning trustee liable for earlier acts.

Section 15643 defines vacancies. Section 15660 fills one from the instrument, then with a trust company those same beneficiaries all accept, then by the court. Removal for cause runs through section 15642. The departing trustee must deliver the property and stays responsible until delivery (section 15644), and section 16062(a) requires an account “upon a change of trustee.”

An incoming trustee’s first 90 days: serve the 16061.7 notice if triggered. Get a new EIN if a revocable trust just became irrevocable; a change of trustee alone does not need one. File Form 56 for each person you act for. Give banks a certification of trust under section 18100.5 instead of the instrument. Unfunded assets are a separate problem, covered in our post on Heggstad petitions.

What does the timeline look like for a Sacramento family?

Carol, a Land Park widow in Sacramento, dies March 12, 2026. Her revocable trust holds her house (about $780,000), a brokerage account (about $410,000), and $65,000 in savings, split equally between her son and her daughter in Roseville. The son accepts as successor trustee on March 23. All names, dates, and figures are illustrative.

Carol was her own trustee, so his 60 days ran from March 23 and the notice was due May 22, 2026. By August his sister has nothing, and on August 10 she sends a written request for the trust terms, asset information, and an account from March 12 forward.

If he mails the notice September 1 and delivers the terms November 20, her last day to contest is January 19, 2027, because 60 days from delivery beats 120 days from service (December 30, 2026). If nothing arrives by October 9, 2026, section 17200(b)(7) is satisfied: 60 days of silence, and nothing provided in the prior six months.

He administers the trust from his Sacramento home, so under section 17005 her section 17200 petition goes to Sacramento County Superior Court, where she can add section 16420 remedies such as reduced compensation or removal. If the account is later contested, section 17211 can shift fees against a bad faith contest or opposition.

Her letter aside, his first annual account comes due after the trust’s first fiscal year, on no fixed day. The account should start from March 12 values and show every dividend, check, and transfer, his fee, the realtor he hired, and closing balances. I would tie it to the brokerage 1099s and Carol’s final Form 1040, and in 2027 to the trust’s first 1041, Form 541, and her K-1.

What is a California beneficiary not entitled to see?

Beneficiaries get information, not a vote on when to list the house. Legal advice is protected: Wells Fargo Bank v. Superior Court, 22 Cal.4th 201 (2000), lets a trustee assert the attorney-client privilege against beneficiaries even for administration advice paid from trust funds, though the fees paid are still a disbursement.

Section 16061 reaches only information relevant to the requester’s interest, so a cousin need not see another branch’s separate share, and a competent living settlor’s affairs stay private. A confidentiality clause cannot justify withholding the terms.

Frequently Asked Questions

How long does a California trustee have to send notice after a death?

Sixty days. Probate Code section 16061.7 requires notice to every beneficiary and heir within 60 days after a death makes the trust irrevocable. If the settlor was also the trustee, the 60 days start when the successor begins serving. Missing it can cost the trustee damages and fees.

Can I see my parent’s trust while my parent is alive?

Usually not. While the trust is revocable and the person who can revoke it is competent, Probate Code sections 15800 and 16069 give the rights to that person, not the children. If that person is shown incompetent, the trustee has 60 days to send the trust to the beneficiaries who would take at death.

What if the trust says the trustee does not have to account?

A waiver in the instrument can excuse the annual account, but under Probate Code section 16064 a court can still order one when a material breach is reasonably likely, and the waiver is void for certain sole trustees, such as the drafter.

How long do I have to contest a California trust?

Under Probate Code section 16061.8, a person served with the trustee’s notice after a death has 120 days from service, or 60 days from delivery of the trust terms within that window, whichever is later. The period runs from service, not from the date of death.

Does a successor trustee need a new EIN?

It depends. The IRS requires a new EIN when a revocable trust becomes irrevocable, the usual case after a settlor dies. A change of trustee alone does not require one. The new trustee should also file Form 56 to notify the IRS of the fiduciary relationship.

Who pays the fees if I have to petition for an account?

Often each side pays its own. Probate Code section 17211 lets the court shift litigation costs when a contest of an account, or the trustee’s opposition to it, lacks reasonable cause and is in bad faith. A trustee who never served the required notice can owe resulting fees under section 16061.9.

How North Star Law Firm Can Help

North Star Law Firm represents beneficiaries and successor trustees in the Sacramento area and the Inland Empire in trust administration, from the 16061.7 notice and first account to a petition to compel one. We also draft revocable living trusts and prepare the trust and estate tax returns that must reconcile with the account. Phillip Zagotti is a California attorney licensed by the State Bar of California and a CPA, so one person does the law and the accounting.

If you are a beneficiary waiting on answers or a successor trustee who just took over, contact North Star Law Firm or schedule a consultation.

Years ago you deeded a rental and a brokerage account into a trust for the kids, and page one says “irrevocable.” Now there is a judgment against you and Chapter 7 is on the table. Will a bankruptcy trustee call that trust yours?

The label matters less than whether you kept a route back to the money and how you treated the property afterward. A July 2026 Arizona bankruptcy ruling, from inside our own Ninth Circuit, pulled a children’s trust into the parents’ estate. California’s Probate Code adds tools of its own.

What happened in Kittrell, and why does it matter here?

In October 2014 the Kittrells, as settlors and trustees, moved their LLC interests into a children’s trust while more than $1.5 million in judgments sat unpaid and another suit was pending. Their son could, acting outside any fiduciary duty, add beneficiaries or revoke in favor of descendants of the grantor’s parents, a class the parents understood included them.

The trust never had a bank account or filed a return, and in 2017 its assets secured a personal loan. After filing Chapter 7 on February 25, 2022, they scheduled the trust as “No value to debtors,” which cost them their discharge under 11 U.S.C. § 727(a)(4)(A) in a September 2025 decision. On July 24, 2026, in Linscott v. Kittrell, Adv. No. 4:22-ap-00206-BMW (Bankr. D. Ariz. July 24, 2026), the court ruled for the Chapter 7 trustee on both theories. The parents were contingent beneficiaries, and the transfer was avoidable under § 548(e) because they admitted forming the trust partly to evade creditors. Even without avoidance, the assets were estate property under § 541, since the couple had “retained absolute control.” The court valued the trust at no less than $15 million as of the petition date and entered the $6.5 million judgment the trustee had requested, enough to pay every claim in full with interest.

Which California rules decide whether a family trust belongs to the settlor?

Bankruptcy borrows state law. 11 U.S.C. § 541(a)(1) brings in “all legal or equitable interests of the debtor in property,” and § 541(c)(2) honors a transfer restriction only if it is “enforceable under applicable nonbankruptcy law.” (When the debtor is the trustee instead, § 541(d) controls, as our Fantasia v. Diodato post explains.)

California’s default surprises people. Under Probate Code § 15400, a trust is revocable unless expressly made irrevocable, and § 18200 exposes revocable trust property to the settlor’s creditors during life. Section 19001 extends that past death when the probate estate falls short.

Spendthrift clauses shield a beneficiary until paid under §§ 15300 and 15301, subject to the 25 percent reach in § 15306.5. None of it helps a settlor-beneficiary. Section 15304(a) voids the restraint, and § 15304(b) lets creditors reach “the maximum amount that the trustee could pay” the settlor, capped at the settlor’s contribution.

The Ninth Circuit applied that rule through § 541(c)(2) in In re Moses, 167 F.3d 470 (9th Cir. 1999). In Cutter v. Seror (In re Cutter), 398 B.R. 6 (9th Cir. BAP 2008), a debtor-trustee who could pay himself support lost the entire corpus to his estate.

Can a creditor argue the trust is the settlor’s alter ego?

Yes. In In re Schwarzkopf, 626 F.3d 1032 (9th Cir. 2010), where the assets included a Temecula house, one trust bought a home the debtor occupied rent-free and paid him at least $105,000 in unexplained fees while its trustee wrote checks on demand. That trust was his alter ego, because “equitable ownership in a trust is sufficient” under California law.

A second trust, formed to defeat creditors, was invalid, so the property sat on a resulting trust and limitations ran only from the trustee’s repudiation. Torrey Pines Bank v. Hoffman, 231 Cal.App.3d 308 (1991), treated settlor-trustee-beneficiaries as the real obligors on their trust’s loan. Greenspan v. LADT, LLC, 191 Cal.App.4th 486 (2010), adds that a trust is not an entity, so the question is whether the trustee is the debtor’s alter ego.

How far back can a trustee or creditor reach the transfer into the trust?

Keep two theories apart. “The trust is estate property” under § 541 has no lookback. “The transfer was avoidable” runs on a clock. California’s Uniform Voidable Transactions Act reaches actual-intent transfers under Civil Code § 3439.04(a)(1), whose listed badges include a transfer to an insider and retained control. Section 3439.05 covers gifts made while insolvent.

Section 3439.09 allows four years from the transfer, or one year from discovery for intent claims, and extinguishes every claim after seven years. A bankruptcy trustee borrows a live claim through § 544(b) and gets two years after the order for relief under § 546(a).

Then comes § 548(e): ten years for a transfer “to a self-settled trust or similar device” where the debtor is a beneficiary and acted “with actual intent to hinder, delay, or defraud.” Kittrell’s October 2014 transfer was more than seven years old at filing. California’s seven-year cap would have killed a UVTA claim; § 548(e) did not.

What do the trust’s tax returns and bank records prove?

A swap power under IRC § 675(4)(C), the kind Mr. Kittrell held, makes a trust a grantor trust for income tax. Treas. Reg. § 1.671-4 then lets a wholly owned grantor trust skip Form 1041, and the FTB’s Form 541 instructions accept those methods.

As a CPA, I read the paper trail as evidence of control. Does the trust have its own EIN and account, and do the rents land there or in the account paying the parents’ mortgage? Then I look for a Form 709 for the funding year; a gift in trust is often a future interest, which requires a 709 at any amount. A signed 709 says the parents treated the gift as complete. A missing one, plus a loan application listing the building as theirs, says otherwise. The Kittrells never filed one.

How would this play out for a Redlands couple facing a judgment?

Assume a Redlands couple put a $920,000 fourplex and a $360,000 brokerage account into a children’s trust on June 14, 2019. The husband is trustee, and the trust lets him pay the settlors for “health and support.” A supplier had sued them on a guaranty that March; a $610,000 judgment followed in April 2026. The $5,800 monthly rents still go to their joint account. All figures are illustrative.

The UVTA claims are dead: four years ran in June 2023, and despite a May 2026 discovery, the seven-year bar fell June 14, 2026, leaving § 544(b) nothing to borrow. But the support clause makes this self-settled, so § 15304(b) lets the creditor reach up to everything the couple contributed, by petition under Code of Civil Procedure § 709.010.

If they file Chapter 7 in the Central District’s Riverside Division before June 14, 2029, expect a complaint pleading estate property under § 541 and Cutter, turnover under § 542, § 548(e) avoidance, and alter ego of the trustee. The 2019 fix was an independent trustee, no settlor distribution clause, a filed 709, and a trust bank account. Today they should stop taking the rents and schedule the trust completely.

How should a California irrevocable trust be set up and run so it holds up?

An independent trustee, not the settlor or a child who takes direction, avoids the Schwarzkopf problem. Draft out every path back to the settlor, including any power that could add the settlor as a beneficiary. Then run it as someone else’s property, because it is: its own account and books, and market rent if the family uses trust property.

One limit no drafting fixes: if the settlor is a beneficiary, § 15304 lets creditors reach what the trustee could pay the settlor.

Frequently Asked Questions

Can a bankruptcy trustee take assets in my irrevocable trust in California?

It can if you kept a beneficial interest or real control. Under 11 U.S.C. section 541, a spendthrift clause protects you only if California law enforces it. Probate Code section 15304 will not enforce it for a settlor who is also a beneficiary. Rent-free use of trust property invites alter ego claims too.

Is a trust for my children self-settled if I am not named as a beneficiary?

Not automatically. In the 2026 Kittrell ruling, parents became contingent beneficiaries because their son could add beneficiaries from a class that included them. Discretion to pay your support has the same effect. Discretion to reimburse your income tax on trust income does not, under section 15304(c).

How long does a creditor have to undo a transfer into a trust in California?

Under Civil Code section 3439.09, an actual-intent claim must be brought within four years of the transfer or one year after it was or reasonably could have been discovered. Every claim dies seven years after the transfer. In bankruptcy, section 548(e) reaches back ten years for transfers to self-settled trusts made with actual intent.

Does reporting a trust as a grantor trust mean it is not really separate?

No. Grantor trust status is an income tax rule, often created on purpose. Treasury Regulation section 1.671-4 lets many grantor trusts report under the grantor’s number without a Form 1041. Courts look instead at control evidence, such as whether the trust had its own account and whether a gift tax return reported the funding.

Can a revocable living trust protect me from creditors in California?

No. Probate Code section 18200 makes revocable trust property subject to the settlor’s creditors during life, and section 19001 keeps it available after death if the probate estate cannot cover the debts. Section 15400 treats a California trust as revocable unless the document expressly makes it irrevocable, so silence leaves the property reachable.

What should we do now if our family trust may be challenged?

Stop any personal use of trust income, make no new transfers, and gather the records showing how the trust was run. If bankruptcy is likely, disclose your roles and interests in the trust completely. The Kittrell debtors lost their discharge because their schedules described the trust as having no value to them.

How North Star Law Firm Can Help

North Star Law Firm represents families, trustees, and creditors across the Inland Empire and the Sacramento area when a trust’s independence is disputed, from trust administration to Chapter 7 adversary proceedings, and we reconstruct the trust and gift tax returns that become the evidence. Phillip Zagotti is a California attorney and a CPA admitted to the U.S. Bankruptcy Court for the Central District of California.

If a creditor or bankruptcy trustee is questioning your family’s trust, or you are trying to reach one, contact North Star Law Firm or schedule a consultation.

A citizen husband in Ontario, a wife from Michoacán who has held a green card since 2012, a trucking company, and a 2015 living trust leaving all to the survivor. The plan is broken in one place: 26 U.S.C. § 2056(d) shuts off the unlimited marital deduction when the surviving spouse is not a United States citizen, and a green card does not cure it.

California softens that. Under Cal. Fam. Code § 760 and Fam. Code § 751 each spouse owns a present, existing, and equal half of the community, and Cal. Prob. Code § 100 puts only the decedent’s half in his estate. Her half was always hers, so it never needs a marital deduction. The answer is usually a qualified domestic trust drafted as a dormant sub-trust inside the living trust, with an off switch if she naturalizes in time.

Why does the marital deduction disappear when a spouse is not a citizen?

Section 2056(a) lets a decedent pass an unlimited amount to a surviving spouse tax free. Section 2056(d)(1)(A) then says that if the spouse is not a citizen, “no deduction shall be allowed under subsection (a).” Section 2056(d)(1)(B) adds, more quietly, that “section 2040(b) shall not apply.” What counts is the recipient’s citizenship, so being a citizen himself does the husband no good.

Lifetime gifts run the same way. 26 U.S.C. § 2523(i)(1) denies the gift tax marital deduction, and § 2523(i)(2) substitutes a bigger annual exclusion, $194,000 for 2026 under Rev. Proc. 2025-32, up from $190,000, against $19,000 for everyone else. Section 2056(d)(4) turns the disallowance off if the survivor becomes a citizen before the return is made and was “a resident of the United States at all times after the date of the death of the decedent.” The return is due nine months after death, § 6075(a).

What does a QDOT require, and who can be trustee?

A qualified domestic trust defers the tax rather than forgiving it. 26 U.S.C. § 2056A(a)(1)(A) requires at least one trustee to be a U.S. citizen or a domestic corporation with the right to withhold the tax from distributions. Under § 2056A(b)(1) the tax lands on principal distributed during the survivor’s life and on what remains at her death, computed at the first decedent’s rates. Income distributions escape it, and § 2056A(b)(3)(B) exempts distributions made “on account of hardship.”

Security is where homemade plans fail. Under Treas. Reg. § 20.2056A-2(d)(1)(i), a QDOT holding more than $2,000,000 must name a bank as defined in section 581 as U.S. trustee, post a 65 percent bond in favor of the IRS, or furnish an irrevocable letter of credit for the same amount. Below that line, § 20.2056A-2(d)(1)(ii) caps foreign real property at 35 percent, measured annually. Section 2056(d)(2)(B) does let property be irrevocably assigned to a QDOT until the return is filed, and the trustee then files Form 706-QDT under § 2056A(b)(5)(A).

How do community property and the deed change the math?

Family Code § 760 makes property “acquired by a married person during the marriage while domiciled in this state” community property, and Fam. Code § 751 calls the spouses’ interests “present, existing, and equal.” Probate Code § 100(a) carries that through death. In a common-law state the business he founded would sit entirely in his gross estate; in Ontario or Elk Grove half is hers, and only his half reaches Schedule F. Section 1014(b)(6) then gives her half a date-of-death basis too, if at least half of the community interest was includible in his estate. Citizenship is nowhere in that test, so the double step-up survives a noncitizen survivor and a QDOT alike.

Titling can undo all of it. 26 U.S.C. § 2040(a) pulls the full value of joint tenancy property into the decedent’s estate except the part “shown to have originally belonged to such other person.” Section 2040(b) normally rescues spouses with a flat fifty percent, and § 2056(d)(1)(B) takes the rescue away. A Fontana duplex deeded in 2007 to “husband and wife as joint tenants” and paid for with community earnings therefore turns on tracing. Half the consideration was hers under Family Code § 751, but she carries the burden of proving it with records from 2007, and a joint tenancy deed is not community property, so whichever half she keeps out of his estate also misses the § 1014(b)(6) step-up.

Community property with right of survivorship, authorized by Cal. Civ. Code § 682.1, fixes that. It takes an express declaration in the transfer document, and the right can be severed the way a joint tenancy is. The asset stays community property, so § 100 halves it and § 1014(b)(6) steps up both halves, and probate is still avoided. Joint tenancy gives survivorship without either benefit; tenancy in common gives neither.

Is a green-card spouse a resident for estate tax purposes?

For estate tax the test is domicile. Treas. Reg. § 20.0-1(b)(1) defines a resident as a decedent who at death “had his domicile in the United States,” acquired by living somewhere “with no definite present intention of later removing therefrom.” That is not the green card and substantial presence test in 26 U.S.C. § 7701(b) that governs income tax residency, and the two can diverge.

A green-card holder whose house and grandchildren are in Corona is a resident decedent: worldwide estate, full exclusion under § 2010, $15,000,000 in 2026. A spouse who is neither citizen nor domiciliary is taxed only on U.S.-situs property under §§ 2104 and 2105, with the $13,000 credit in § 2102(b) sheltering about $60,000. Immigration status and estate tax residency are separate questions. We give no immigration advice, but naturalization timing belongs on the planning calendar, because § 2056(d)(4) turns on it.

Can portability still work when the surviving spouse is not a citizen?

You often read that portability is unavailable in a mixed-citizenship marriage. The regulation is narrower. Treas. Reg. § 20.2010-3(e) denies the deceased spousal unused exclusion amount to a surviving spouse who is a nonresident and not a citizen at death, except as a treaty allows. A green-card spouse domiciled in California is not in that paragraph.

What applies to her is timing. Under § 20.2010-3(c)(3), when property passes to a QDOT the DSUE is redetermined under Treas. Reg. § 20.2010-2(c)(4) and is not included in her exclusion until the final QDOT distribution or other § 2056A event, or on the date she becomes a citizen if § 2056A(b)(12) is met. The exclusion is parked, not lost, and cannot fund lifetime gifts meanwhile. None of it happens without the election on a return filed for the first decedent, § 2010(c)(5)(A).

What does this look like for an Ontario couple with a trucking company?

He is a U.S. citizen; she is a Mexican national with a green card since 2012. All figures are illustrative. Community property of about $10,000,000: a trucking company worth $6,000,000, rentals in Fontana and Rialto worth $2,400,000, a home and accounts worth $1,600,000. He also holds $1,500,000 inherited in 2019, never commingled, so it stays separate. He dies in March 2026, and his gross estate is his $5,000,000 half plus the $1,500,000 account, or $6,500,000. Her half is not in it.

Section 2056(d) therefore bites on $6,500,000 rather than $11,500,000, and against a $15,000,000 exclusion the estate owes nothing either way. The QDOT here is about the deduction line, the portability election, and the exclusion when she dies. If she takes the oath before the 706 is filed and stayed resident throughout, § 2056(d)(4) makes the structure unnecessary.

Change one fact: say the rentals were deeded as joint tenants in 2007. Now the outcome depends on paperwork. If she cannot trace her contribution, section 2040(a) puts the whole $2,400,000 in his estate, which happens to give the entire property a new basis but throws the full value against the § 2056(d) problem instead of half. If she traces half, only $1,200,000 is included, and because a joint tenancy is not community property her half keeps its 2007 basis. On $900,000 of built-in gain that is a lost step-up on roughly $450,000, real money on a later sale even though the estate tax was zero.

What happens to the property in Mexico, and what has to get filed?

There is no estate or gift tax treaty between the United States and Mexico. The IRS lists estate or gift tax treaties with fifteen countries, among them Canada, France, Germany, Japan and the United Kingdom. Mexico is absent, as are the Philippines and Vietnam, which matters for families in Stockton and Modesto. A resident spouse’s worldwide estate is taxed here while Mexico applies its own rules. Coastal and border-zone property is usually held through a fideicomiso, the bank trust foreign buyers must use there, and that interest counts against the 35 percent ceiling if it lands in the QDOT.

California itself takes nothing: Rev. & Tax. Code § 13302 imposes only a pick-up tax measured by the federal credit for state death taxes, which has not existed for two decades. Gifts above $194,000 a year go on Form 709, and couples shuffling money between accounts to even things out make reportable gifts without meaning to. Used on purpose it is a sound equalization tool, though in California it is usually separate property you are moving.

Frequently Asked Questions

Does my spouse’s green card solve the marital deduction problem?

No. Under 26 U.S.C. 2056(d) the marital deduction is denied whenever the surviving spouse is not a United States citizen, and permanent residence is not citizenship. The card matters elsewhere, but only citizenship or a qualified domestic trust closes this gap.

What is a QDOT, and do we need one under $15 million?

A qualified domestic trust under 26 U.S.C. 2056A lets property passing to a noncitizen spouse qualify for the marital deduction, deferring tax until principal is distributed or the survivor dies. Below the exclusion no tax is due either way, so most California couples draft it as a dormant sub-trust.

Does community property help?

Yes, and it is why the problem is smaller here. Cal. Fam. Code 751 gives each spouse a present, existing, and equal interest in community property, and Cal. Prob. Code 100 confirms one half already belongs to the survivor at death. Only the decedent’s half enters the gross estate.

Can we fix it after death?

Often, if you move fast. Section 2056(d)(2)(B) treats property as passing to a qualified domestic trust if it is transferred, or irrevocably assigned under an assignment enforceable under local law, before the estate tax return is filed. That return is due nine months after death under 26 U.S.C. 6075(a).

What is the annual gift limit to a noncitizen spouse in 2026?

For 2026 it is $194,000 under 26 U.S.C. 2523(i)(2), set in Rev. Proc. 2025-32, up from $190,000. The ordinary annual exclusion is $19,000. Larger gifts are reportable on Form 709, and informal transfers between spousal accounts can create one nobody intended.

What happens to property in Mexico?

There is no estate or gift tax treaty between the United States and Mexico, so nothing stops both systems from reaching the same property. A surviving spouse who is a U.S. resident for estate tax purposes has her worldwide estate inside the federal system, and coastal property held through a fideicomiso still has to be valued and reported.

How North Star Law Firm Can Help

North Star Law Firm drafts and repairs estate plans for mixed-citizenship couples across the Inland Empire and Sacramento area, including revocable living trusts with a dormant QDOT sub-trust, titling corrections, and estate and trust tax returns plus trust administration when the § 2056(d)(2)(B) window is all that stands between a family and a lost deduction. Phillip Zagotti is a California attorney and a CPA admitted to the U.S. Tax Court, so the drafting and the returns get reviewed together.

If one of you is not a U.S. citizen and your trust has not been reviewed since the $15,000,000 exclusion took effect, contact North Star Law Firm or schedule a consultation.

A widower’s estate lost about $3.7 million of federal exemption last summer because his late wife’s Form 706 listed her property and left every value blank. That is Estate of Rowland v. Commissioner, T.C. Memo. 2025-76 (July 15, 2025): a return filed for no reason except portability is still held to the completeness standard in Treas. Reg. § 20.2010-2(a)(7).

In California that runs into a common assumption. The state has no estate tax, and community property gets a full basis step-up at the first death under 26 U.S.C. § 1014(b)(6), the survivor’s own half included. Both true, and neither touches the exemption the survivor will need later.

Short answer: if a couple’s community estate approaches half the federal basic exclusion amount, $15,000,000 for deaths in 2026, file at the first death, and prepare the return as though the IRS will read every schedule.

What did the Tax Court actually hold in Estate of Rowland?

Fay Rowland died in April 2016, her husband Billy in January 2018. No return was required, but her executor filed one to elect portability, six months late, though inside the two-year window then allowed by Rev. Proc. 2017-34. The return listed real property, closely held stock, and bank accounts, entered “$0” for each category, reported $3 million as the estimated value of assets subject to the special rule, and claimed a DSUE amount of $3,712,562.

Her trust gave twenty percent to a family charitable foundation, gave Billy one-fourth of her gross estate, and poured the residue into trusts for grandchildren. Treas. Reg. § 20.2010-2(a)(7)(ii) lets an executor describe rather than value marital and charitable deduction property, but not where that value “relates to, affects, or is needed to determine, the value passing from the decedent to a recipient other than the recipient of the marital or charitable deduction property.”

The grandchildren took the residue, so those figures controlled. Chief Judge Urda granted partial summary judgment to the Commissioner and turned away both substantial compliance and equitable estoppel.

Doesn’t California community property already take care of this?

It takes care of a different tax. Section 1014(b)(6) gives a new basis to the surviving spouse’s half of the community, not just the decedent’s, so long as at least half the community interest was includible in the decedent’s gross estate. That is an income tax rule about a later sale. Portability is a transfer tax rule, and 26 U.S.C. § 2010(c)(5)(A) gives the survivor none of the DSUE amount defined in § 2010(c)(4) unless the executor “files an estate tax return on which such amount is computed and makes an election on such return.”

No state tax makes this worse. California’s estate tax at Rev. & Tax. Code § 13302 is a pick-up tax pegged to the federal credit for state death taxes, gone since January 1, 2005, and the State Controller says no California estate tax return has been required since. A gross estate under the exclusion means no federal return is required under § 6018(a). Not required and not worth filing are different things.

How long does a California surviving spouse have to fix a missed election?

Nine months from death, plus six more if a Form 4768 goes in on time. The automatic extension comes from Treas. Reg. § 20.6081-1(b) under 26 U.S.C. § 6081, and Treas. Reg. § 20.2010-2(a)(1) ties the election to that date.

After that, Rev. Proc. 2022-32 is the rescue. Effective July 8, 2022, it lets an executor file by the fifth anniversary of death if the decedent was a citizen or resident who died after December 31, 2010 survived by a spouse, the estate was not required to file under § 6018(a), and no timely return went in. The return must carry a statement at the top: “FILED PURSUANT TO REV. PROC. 2022-32 TO ELECT PORTABILITY UNDER § 2010(c)(5)(A).”

If the gross estate plus adjusted taxable gifts turns out to have exceeded the exclusion, the relief is null and void ab initio, leaving only a § 9100 letter ruling. Section 4.01 also demands a “complete and properly prepared Form 706” under Treas. Reg. § 20.2010-2(a)(7), the sentence the court applied in Rowland. A late return that is still wrong buys nothing.

What goes on a portability-only Form 706 when the estate is community property?

Only the decedent’s half. Cal. Fam. Code § 760 makes property acquired during marriage while domiciled here community property, and Cal. Prob. Code § 100(a) provides that on death “one-half of the community property belongs to the surviving spouse and the other one-half belongs to the decedent.” The survivor’s half stays outside the gross estate and still takes a new basis, so the return still has to show the property was community.

The estimate rule can apply here, and often does when everything pours into a survivor’s trust. Subparagraph (a)(7)(ii) lets the executor describe marital and charitable property without valuing it, so long as the executor uses due diligence to estimate the gross estate and reports the matching range from the Instructions for Form 706 under penalties of perjury.

The exceptions catch California trusts. The rule is off the table when a value affects what a non-spouse, non-charitable beneficiary receives, when it is needed for § 2032 or § 2032A or another estate or generation-skipping provision, when only a partial interest qualifies, or on a partial disclaimer or QTIP election. A formula bypass share, a disclaimer trust, a QTIP marital trust, or a carve-out for children of a prior marriage lands on the Rowland side of that line.

What does “complete” mean for a house and a closely held business?

Date-of-death fair market value, asset by asset, on the right schedule. The home goes on Schedule A with a real appraisal. S corporation stock goes on Schedule B with an actual valuation and discounts that are supported, not asserted. Where a value is genuinely hard to pin down, the answer is a defensible estimate with the methodology in the file, not a blank.

The return does two jobs: it elects portability, and it is the contemporaneous record behind the stepped-up basis the survivor claims on a later sale. There is a fiduciary dimension too: a trustee who lets the nine months lapse, or signs a return with zeros in the value column, hands the surviving spouse a claim to weigh against the preparer or the fiduciary.

What does this look like for a Redlands couple with a $9 million community estate?

Assume a Redlands couple, all community property: a home in the historic district at $1.4 million, a Riverside fourplex at $1.6 million, stock in their HVAC S corporation at $4.5 million, and $1.5 million in retirement, brokerage, and cash. He dies in March 2026 and it all stays in trust for her. The figures are illustrative; future indexing is unknown, so the example freezes the exclusion at 2026.

His gross estate is his half, $4.5 million, and the marital deduction takes his taxable estate to zero, so the DSUE is the full $15,000,000 and her applicable exclusion becomes $30,000,000. Separately, all $9 million takes a new basis under section 1014(b)(6).

Say she dies in 2036 and assets grew 7 percent a year, taking $9 million to roughly $17.7 million. With no return ever filed, her exclusion is $15 million, her taxable estate about $2.7 million, and the tax at the 40 percent top rate under 26 U.S.C. § 2001(c) runs about $1,080,000. A return filed but defective the way Fay Rowland’s was produces the identical number, found long after the Rev. Proc. 2022-32 window closed. With a complete return, the tax is zero.

Does remarriage change the DSUE amount?

Not by itself. Treas. Reg. § 20.2010-3 makes the available DSUE that of the surviving spouse’s last deceased spouse, and a decedent keeps that status “even if, on the date of the death of the surviving spouse, the surviving spouse is married to another (then-living) individual.” A Temecula widow who remarries in 2029 still has her first husband’s DSUE.

The new spouse dying first is what changes it. If his executor makes no election, the earlier DSUE is gone except to the extent it “was applied to one or more taxable gifts of the surviving spouse.” Where remarriage is likely, spend the DSUE on lifetime gifts. Divorce is not the danger: the later death of a divorced spouse does not end the prior spouse’s status.

Frequently Asked Questions

Do I have to file a Form 706 in California if there is no California estate tax?

Nothing at the state level: California has required no estate tax return for deaths on or after January 1, 2005. Federally, no return is required if the gross estate is under the basic exclusion amount, $15,000,000 for deaths in 2026. Filing anyway is the only way to capture the unused exclusion.

Does California’s community property step-up make portability unnecessary?

No. Section 1014(b)(6) gives both halves of community property a new income tax basis at the first death, which reduces capital gain on a later sale. Portability under section 2010(c) concerns the federal estate tax exemption at the second death. Only the basis adjustment happens without paperwork.

What did the Tax Court decide in Estate of Rowland?

In Estate of Rowland v. Commissioner, T.C. Memo. 2025-76 (July 15, 2025), the court held that a return filed purely to preserve a spouse’s exemption still must meet the completeness standard of Treasury Regulation section 20.2010-2(a)(7). It listed assets but reported zero values, and percentage gifts to a spouse, a foundation, and grandchildren put the reduced reporting rule out of reach, so about $3.7 million of exclusion was lost.

How long do I have if we missed the portability deadline?

Revenue Procedure 2022-32 allows an executor to file a complete and properly prepared Form 706 by the fifth anniversary of the decedent’s death, provided the estate was not required to file under section 6018(a) and no timely return went in. The return must say at the top that it is filed pursuant to that procedure. After that, the only route is a private letter ruling.

Does remarriage affect the DSUE?

Remarrying does not by itself cost the surviving spouse anything, because under Treasury Regulation section 20.2010-3 a decedent stays the last deceased spouse even if the survivor is married to someone else at death. The risk is the new spouse dying first, which wipes out the earlier DSUE except to the extent already applied to taxable gifts.

What if the estate has assets that are hard to value, like a closely held business?

Hard to value does not mean exempt from valuation. The executor must exercise due diligence and report a supportable date-of-death figure, or, where the reduced reporting rule applies, a good-faith estimate within the range in the Instructions for Form 706. An appraisal and a business valuation protect both the election and the later basis claim.

How North Star Law Firm Can Help

North Star Law Firm prepares and reviews portability returns for Inland Empire and Sacramento-area families, including late elections under Rev. Proc. 2022-32, and handles the trust side through trust administration, trust and estate tax returns, and revocable living trust planning. Phillip Zagotti is a California attorney and a CPA admitted to the United States Tax Court, so valuation and controversy exposure are weighed together.

If your spouse died within the last five years and no estate tax return was filed, or one was filed and you are not sure it was done right, contact North Star Law Firm or schedule a consultation.

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.

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.