A living trust is a legal document that will enable you to give your money and/or property to your loved ones after you pass away, free of court supervision. Many homeowners could save their heirs a lot of money by having a living trust prepared. In order to understand the potential benefits of living trusts, it is important to first understand what wills are and how the probate process works.
What is a Will?
A will gives you control over the distribution of your estate. It is like a letter to the court. In a will you may name beneficiaries to receive your assets, nominate executors, nominate a guardian to take care of your children, and express your wishes about burial or cremation.
Documents and Forms of Ownership to Consider
A will is a suitable estate planning tool for many people. Individuals with wills should also strongly consider having a durable power of attorney for finances and an advance health care directive drafted. For more information about these possibilities, see “Additional Estate Planning Documents.” For simple estates, wills and powers of
attorney, along with pay-on-death or joint tenancy accounts, may be sufficient estate planning tools.
Each of the documents mentioned above have precise requirements that must be met for them to be valid in the State of California. Improperly executing a document defeats the purposes of estate planning, so consult an attorney to be sure you obtain valid documents.
Disadvantages of Wills Without Trusts
The main disadvantage of a will alone is that an individual’s estate may need to be settled through a court probate procedure, which takes a significant amount of time and money. Probate is described in detail below. Another disadvantage of a will is that a married couple with substantial assets may have to pay federal estate taxes if they had wills only but not a trust. For more information about federal estate taxes for married couples, see “Trusts for Married People.” Another disadvantage of wills without trusts is that they do not enable parents to give specific directions about financial care for their minor
children.
Probate
Probate is a Superior Court proceeding used to clear the titles of estates. It was originally designed to ensure that creditors got their money before the estate passed to the heirs. In California, estates with real property (e.g., houses) worth more than $20,000, or other assets worth more than $100,000 such as cash, stocks, bonds will eventually have to go through probate unless enough of the assets pass to the heirs through pay-on-death (P.O.D.) accounts. However, with a living trust, no probate is necessary. A probate proceeding typically takes between nine months and two years to complete.
The Cost of Probate
Probate fees are dictated by California law. The cost is based on the value of your estate, hence increases with the size of the estate. For homeowners, your home value includes the mortgage. For example, if your home is worth $600,000 and you have a $150,000 mortgage, the statutory probate fees would be based on the full $600,000 value. The statutory fees for an executor and an attorney would be $30,000 if you did not own anything other than the $600,000 house. If you have $200,000 in other assets, as well as a $600,000 house, the statutory fees for the executor and attorney would be $38,000. This does not include court fees and “extraordinary fees” granted by the court, preparation of death tax returns or other miscellaneous expenses. A court may grant attorneys and executors extraordinary fees for services such as selling assets during probate.
Minimum Fees to Probate a Will
This chart lists the minimum statutory probate fees for the attorney and executor’s fees combined -- provided that neither the executor nor the attorney agrees to work for reduced fees. (Note that executors, who would be eligible for half of each fee total listed here, sometimes agree to give up their fees, especially if they are also the deceased person's beneficiaries. Also, in simple cases attorneys sometimes agree to charge fees below the statutory rate.)
See: California Probate Code Secs. 10800 and 10810.
| Total Assets |
Fee |
| $100,000 |
$8,000 |
| $200,000 |
$14,000 |
| $300,000 |
$18,000 |
| $400,000 |
$22,000 |
| $500,000 |
$26,000 |
| $600,000 |
$30,000 |
| $700,000 |
$34,000 |
| $800,000 |
$38,000 |
| $900,000 |
$42,000 |
| $1,000,000 |
$46,000 |
| $1,500,000 |
$56,000 |
| $2,000,000 |
$66,000 |
| $3,000,000 |
$86,000 |
| $4,000,000 |
$106,000 |
| $5,000,000 |
$126,000 |
What is a Living Trust?
Like a will, a living trust is an estate planning document enabling you to give your money and/or property to your loved ones after you pass away. Unlike a will, a living trust operates free of court supervision. Living trusts have been used in the U.S. since the Constitution was drafted.
Living trusts are revocable, which means they can be changed or revoked at any time. (In the case of a married couple, part of a trust may become irrevocable -- that is, unchangeable -- after the first spouse passes away.)
How a Living Trust Works
There are four main types of parties involved in a living trust. First is the “settlor,” who creates the trust and owns the property to be transferred into it. Second is the “trustee,” or the person who manages the trust. The settlor is usually the initial trustee. If you create a trust in this manner, you will have complete control of your money
so long as you are both the settlor and the trustee. The third party is the “successor trustee.” If you die or are incapacitated, the successor trustee takes over as the manager of the estate. The fourth party is the “beneficiary,” the person who will receive your estate when you pass away. There may be more than one settlor, trustee, successor trustee, or beneficiary.
The trust document describes the role each of these four parties plays. It outlines how the management of the property passes from the trustee (probably you) to the successor trustee (a trusted party, usually a loved one but sometimes an institutional trustee such as a bank's trust
department) for the benefit of your beneficiaries.
General Advantages of Living Trusts
1. A probate proceeding will probably not be necessary for your estate if you have a trust.
2. At upper asset levels, a living trust is designed to reduce
the federal estate taxes your estate will owe. (As we'll discuss below, the asset level that triggers federal estate tax is a subject of current legislative debate in Congress.)
3. If you become incapacitated, a court-imposed conservatorship is unlikely to be necessary to manage your affairs, because your successor trustee can manage your
property without court supervision.
4. Parents can decide how soon their children will receive income and principal from the trust. Parents can also give specific instructions about financial management for their
children.
Advantages of Living Trusts for Small Estates
If you own a home or any other real property (land), or if you own more than $100,000 in assets, you should definitely consider the advantages of living trusts. If you do not have a living trust, your estate will eventually be subject to probate, unless enough of your property is held in joint tenancy or “pay on death” (P.O.D.) accounts at the time of your death. The cost of probate can be particularly devastating to small estates.
Advantages of Living Trusts for Homeowners
It is possible for homeowners to hold real property in joint tenancy form in order to avoid probate proceedings, but there are major disadvantages to this type of ownership. Under a joint tenancy, if one joint tenant (co-owner) dies, the other holds a right of survivorship. That is, upon
the death of one joint tenant, the entire property automatically passes to the surviving joint tenant. However, the property still needs to go through probate after the death of the surviving joint tenant. There may be problems with holding property in joint tenancy with your child. For example, if your child incurs liability through an event such as a car accident, your house may be at risk to creditors because the child is part owner of the property. Moreover, there may be adverse tax consequences for a child who receives a home in the form of a gift through joint tenancy ownership, rather than as an inheritance. If a home is given through joint tenancy, the child will not receive a full basis step-up for capital gains tax purposes if the home is sold.
Federal Estate Taxes
Two tax principles important for estate planning are the federal estate and gift tax exemption and the unlimited marital deduction.
Pursuant to the federal estate and gift tax exemptions, each individual has lifetime federal estate and gift tax exemptions. The “estate tax applicable exclusion amount” -- the asset level where estate tax kicks in -- is $3.5 million for people who pass away during 2009. This means each person is able to give away $3.5 million free of tax in the form of an inheritance.
Unless Congress changes the law, there will be no federal estate tax for people who pass away during the year 2010.
Currently, the estate tax applicable exclusion amount is scheduled to revert to $1 million per person in 2011. However, this threat of increased estate tax for people who die in the "wrong" year has inspired so many morbid jokes and predictions that Congress seems likely to change the law rather than let them come true. Some say the estate tax applicable exclusion amount will be fixed at $3.5 million or above starting in 2010, but we don't know for certain.
Federal estate taxes, when they do apply, are high, ranging from 41% to 45% of assets above the exemption amount. A living trust can substantially reduce estate taxes for couples whose estates do reach the current federal asset threshold.
The unlimited marital deduction allows U.S. citizen spouses to pass unlimited assets to each other upon death, without federal estate taxation. Unfortunately, if one spouse dies before both spouses have executed proper estate planning documents, that spouse’s estate may fail to use its estate tax exemption, creating possible tax disadvantages for the surviving spouse or his/her heirs.
For further discussion of estate taxes for married couples, see “Trusts for Married People.”
