Legal Question in Wills and Trusts in California

I think you are confusing the function of the trustee. Your mother-in-law as the Settlor of the trust was the legal owner in that the trust was most likely revocable during her lifetime. Upon the death of the surviving spouse, the trust should have become irrevocable and the trust becomes a separate legal entity and requires a trust Tax ID number. Obviously I don't know the specifics of the trust assets or distribution, but I strongly recommend that your husband seek legal representation on trust administration. If the trust is a simple distribution to children of your mother-in-law, this should be a simple process and not terribly expensive. I would be happy to review the situation with your husband and talk about specifics.

As Mr. Feldman points out, a trustee does not own anything in the trust but merely handles the instructions as to how the trust is to distribute assets, functions, etc. The trust assets are distributed to the beneficiaries,not the trustee. If it was a revocable trust, yor mother-in-law wa still the owner of the assets; upon her death title would be in the Trust and the propety would get a stepped up basis to the fair market value at the time of her death. That should eliminate any significant capital gains. Since she never sold the house while alive, the $250,000 exclusion should not apply, but that should not matter because of the stepped up basis.

Since you obviously are confused by what the law is, it would definitely be best to spend the money to see a trust attorney to review the trust documents and advise you on the tax consequences, law, etc.

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Both the previous answers are correct, but let me try to simplify them for you. You have two issues even though you only asked about one. The tax issue is really the second issue but I'll take it first. When property passes from a person to their heirs, whether it is by will or through a trust, the property automatically gets treated as if it were bought at fair market value for tax purposes. So capital gains resets to zero. That is what the other attorney meant by "stepped up basis." That means that unless the property increased in value between her death and when you sold it, there is no capital gains tax. The other issue is the matter of the difference between being a trustee versus beneficiary. Since you already sold the house, if you used a title company and the buyers received title insurance, I'd be willing to bet you handled that transaction properly. Title insurance underwriters are pretty good at making sure that the seller has properly adminstered the right to sell. If you have not done so already, however, I agree that it would be worth sitting down with an attorney to make sure your husband dots all "i's" and crosses all "t's" in handling the estate/trust. The attorney his mother used for the trust documents would probably be your best bet.