How to Fund a Trust Without Triggering a Tax Event

Creating a trust is a powerful step toward managing your assets and providing for your family's future. However, the process of moving assets into that trust, known as "funding," requires careful attention to avoid unintended tax consequences. Seeking guidance from a knowledgeable attorney is a practical way to prevent costly mistakes and give you confidence that your financial goals will be met. 

The Elder & Disability Law Firm, APC brings years of dedicated experience in estate planning, helping clients build solid plans for the future. Their legal team guides people through every step, showing them how to protect their assets, plan for their later years, and create a smooth transition for their loved ones. Located in Redlands, California, serving Southern California, including Riverside, Rancho Cucamonga, and Palm Springs. 

What Does It Mean to Fund a Trust? 

A trust is like an empty container until you put something in it. Funding a trust involves transferring ownership of your assets from your name to the name of the trust. This can include real estate, bank accounts, investment portfolios, business interests, and personal property. 

When you fund a trust, you are retitling your assets. For example, a home deed would be changed from "John and Jane Doe" to "John and Jane Doe, Trustees of the Doe Family Trust." Similarly, a bank account would be renamed to reflect the trust as the owner. If an asset is not properly funded into the trust, it will not be governed by the trust's terms upon your incapacity or death. Instead, it may have to go through the public and often lengthy probate court process. 

Funding a Revocable Living Trust Without Tax Issues 

For most people, the primary estate planning tool is a revocable living trust. This type of trust offers excellent flexibility, as you can change its terms, add or remove assets, or even dissolve it entirely during your lifetime. 

When you transfer assets into a revocable living trust, you generally do not trigger a tax event. The Internal Revenue Service (IRS) views this type of trust as a "grantor trust." This means that for tax purposes, the trust is disregarded, and all income, deductions, and credits are reported on your personal income tax return, just as they were before. You continue to use your own Social Security number for all trust assets. 

Since the IRS does not see the transfer as a completed gift, there are no gift tax implications. You are essentially just moving assets from one of your pockets to another. As the trustee, you maintain control over the assets, so from a tax standpoint, nothing has truly changed. 

Types of Assets and How to Fund Them 

The method for funding a trust varies depending on the type of asset. 

Real Estate 

To transfer real property into your trust, you must sign a new deed. This deed transfers ownership from you as an individual to you as the trustee of your trust. Once signed and notarized, the deed must be recorded with the county recorder's office in the county where the property is located. 

Bank and Brokerage Accounts 

For financial accounts, you will need to work with each financial institution. Most banks and brokerage firms have their own forms for retitling an account in the name of a trust. You may need to provide a copy of your trust document or a certificate of trust. Some people choose to open new accounts directly in the name of the trust. 

Retirement Accounts (401(k)s, IRAs) 

Retirement accounts are a special case. You should not change the ownership of these accounts to your trust. Doing so would be considered a full distribution, resulting in immediate income taxes and potential penalties. Instead, you can name the trust as the primary or contingent beneficiary of the retirement account. This allows the trust to control the assets after your passing, but it requires specific language within the trust to manage tax implications for your heirs. 

Business Interests 

If you own a business, transferring your interest depends on the business structure. For a sole proprietorship, you can sign a general assignment document transferring business assets to the trust. For an LLC or partnership, you may need to amend the operating agreement or partnership agreement to reflect the trust as the owner of your interest. 

California Laws and Property Taxes 

California has specific rules that homeowners should understand when funding a trust. Proposition 13 limits annual increases in property taxes to a maximum of 2%. A property is typically reassessed at its current market value when ownership changes, which can lead to a significant tax increase. 

However, California provides an exclusion for transfers of real property into a revocable living trust. As long as you are the creator of the trust and the primary beneficiary during your lifetime, the transfer will not trigger a property tax reassessment. You will need to file a Preliminary Change of Ownership Report (PCOR) with the county when you record the new deed to claim this exclusion. 

Furthermore, California law allows for parent-child and grandparent-grandchild exclusions. These rules let you transfer certain properties to your children or grandchildren, either during your life or at death, without a property tax reassessment. A properly structured trust is a standard tool used to make sure these transfers qualify for the available exclusions. 

Irrevocable Trusts and Potential Tax Events 

Unlike revocable trusts, irrevocable trusts cannot be easily changed or dissolved. When you transfer assets into an irrevocable trust, you are typically relinquishing control and ownership of those assets. Because of this, the transfer is considered a completed gift by the IRS. 

This means you may need to file a gift tax return. However, most people will not owe any gift tax due to the lifetime gift and estate tax exemption. For 2025, this exemption is quite high, allowing individuals to gift a substantial amount over their lifetime without paying federal gift tax.

Using a portion of your exemption to fund an irrevocable trust can be a strategic move to reduce the size of your taxable estate in the future. Irrevocable trusts are often used for asset protection, Medi-Cal planning, and advanced estate tax planning. 

Social Security Cancellation Attorney Serving Redlands, California 

The Elder & Disability Law Firm, APC is a hands-on legal practice that guides clients through every step of the planning process. The firm focuses on helping your family preserve its assets for future generations. The central goal is to provide clients with legal guidance they can use to build a secure plan.

The team works to help you protect your property, your family, and your independence as you grow older. If you're located in Southern California, including Redlands, Riverside, Rancho Cucamonga, and Palm Springs, please get in touch with The Elder & Disability Law Firm, APC, for a consultation.