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  • A Fresh Approach. Comprehensive Estate Planning.
  • A Fresh Approach. Comprehensive Estate Planning.
  • A Fresh Approach. Comprehensive Estate Planning.

Why Do You Need a Living Trust?

A living trust, also called a revocable living trust, is an agreement between you, the creator of the trust, and you, the owner and manager of the trust estate. You, as owner and manager, agree to hold title to property and manage the trust property for the benefit of the beneficiaries of the trust (you are also the beneficiary). A living revocable trust is named this way because it goes into effect when you are alive and can be changed or revoked at any time while you are alive and well. In your trust document, you will nominate a back-up trustee to manage or distribute all of the property of the trust if you are incapacitated or deceased.

There are four primary benefits of creating a revocable living trust:

1. A revocable living trust empowers your estate to avoid probate.

2. A revocable living trust helps you plan for the possibility of incapacity.

3. A revocable living trust helps you to protect your beneficiaries by allowing maximum flexibility and control over the distribution of your estate.

4. A revocable living trust allows you to minimize estate taxes and expenses to your beneficiaries.

A Revocable Living Trust Empowers Your Estate to Avoid Probate.

Probate is a court-supervised process, used to transfer assets from a deceased person to a living person. In California, probate is unavoidable if a person dies without the proper estate planning documents in place and owns more than $150,000 in assets. The only way to avoid probate is by implementing a well-designed estate plan, and many people are surprised to find out that a will does NOT avoid probate. You have probably heard that you should avoid probate at all costs, but do you know why? There are several reasons; most notably, probate restricts your family’s access to your assets, is expensive, time-consuming, public, and completely unnecessary.

…many people are surprised to find out that a will does NOT avoid probate.

 

Restricted Access to Assets.

During probate, your family has no immediate access to cash. Your assets will be frozen, and therefore unavailable to your spouse, children, or anyone who depends on you financially. There is petition that can be filed with the probate court to free up some assets, however, going through that process is expensive and time-consuming. It can take weeks or months to gain access to those assets; in the meantime, your family is forced to foot the bill for all of your final costs without using your money – funeral, utilities, property insurance, taxes, storage fees, attorney’s fees, etc. Avoiding probate allows your family to have immediate access to cash to pay bills.

Probate Is Expensive.

The fees for probate are set by law, and are calculated based on the GROSS VALUE of your estate, i.e., based on everything you own, but nothing you owe. That means that if you purchased a home worth $1 million, and you have a $990,000 mortgage, the probate fee will be calculated based on the $1 million value, not based on your $10,000 equity. The estimated probate fee would be $46,000 to transfer your $10,000 equity!

The following chart represents sample estate values and estimated probate fees.

Gross Value of EstateEstimated Probate Fee*Probate Fee with Proper Estate Planning
$250,000 $16,000 $0
$500,000 $26,000 $0
$1,000,000 $46,000 $0
$2,500,000 $76,000 $0
$5,000,000 $126,000 $0
$10,000,000 $226,000 $0

*The probate fee represents the fees authorized by the California Probate Code, and additional special fees may apply. The probate fee is split between the attorney that handles the probate of your estate and your executor/administrator. The probate fee is not a tax; it is charged in addition to any assessed estate taxes. These estimated probate fees are for informational purposes only and should not be considered nor relied on in place of legal advice; these fees are a general estimate based on California Probate Code Section 10810's general provisions and are not fact-specific.

Probate Is Time-Consuming.

In California, probate can last anywhere from nine months to two years, and as mentioned above, during that time, all of the assets are frozen, and therefore not available to your spouse/children/people you support. On top of this, most actions needed to wrap up an estate have to be approved by a judge. It can take months to get a judge's approval of the executor’s decision to continue or sell the deceased person’s business, repair or sale of real estate, and the abandonment of worthless assets (e.g., a timeshare with high annual maintenance fees). While the executor is waiting for approval, expenses associated with assets such as these eat away at the value of the estate. Avoiding probate saves your family time, money, and hassle.

Probate Is Public.

This means that anyone can find out what your assets were, what your debts were, and who is inheriting from you. Anyone can, at any time, go to the courthouse and obtain a copy of a deceased person’s probate file. Avoiding probate keeps your family and financial information private.

Probate Is Completely Unnecessary.

There is a much easier, faster, less stressful, less expensive, and completely private way to transfer your assets on your death. The best way to avoid probate is by creating and funding a revocable living trust. In particular, if you create a living trust and transfer ownership of your assets to your trust, your property is transferred at death by contract rather than under the laws of probate. Probate laws apply only if there is no living trust in place - that means that if you have a will but no trust, or have no will and no trust, your estate will go through probate.

The best way to avoid probate is by creating and funding a revocable living trust.

 

A Revocable Living Trust Helps You Plan for the Possibility of Incapacity.

As was mentioned previously, as long as you are alive and well, you are the trustee, or owner/manager of all of the property of your trust. If, however, you are ever in the position where you are living but are unable to make financial decisions for yourself or pay your own bills, your back-up trustee is then allowed to step in and manage your assets in your place and on your behalf (e.g., paying for your care, your mortgage, insurance, the needs of your children, etc.). In the absence of this arrangement, if you were to find yourself without capacity and with no one authorized to manage your finances, your loved ones would be forced to petition the court for a conservatorship over you; this is a legal process that is arduous, time-consuming, very costly, and like probate, can be avoided altogether if you have a revocable living trust.

What if there comes a time that you can’t take care of yourself? Without the proper documents, your family will have to go to court, spending time and money, for the right to take care of you.

 

A Revocable Living Trust Helps You Protect Your Beneficiaries by Allowing Maximum Flexibility and Control Over the Distribution of Your Estate.

There are three options when it comes to estate planning:

1. Do Nothing.

2. Execute a Will.

3. Execute a Revocable Living Trust as the Basis of Your Estate Plan.

If you choose to DO NOTHING, this will happen on your death:

  • California law will kick in and will determine who inherits from you, how much they inherit, and when they inherit;
  • Your estate (if valued at more than $150,000) will have to go through a formal probate before it can be distributed, which will eat up your beneficiaries’ time and money;
  • Your beneficiaries may have to pay a hefty estate tax bill upon inheriting from you.

If you EXECUTE A WILL (and no revocable living trust), this will happen on your death:

  • Most likely, your minor beneficiaries will receive their entire inheritance, no strings attached, upon reaching the age of eighteen;
  • Your estate (if valued at more than $150,000) will have to go through a formal probate before it can be distributed, which will eat up your beneficiaries’ time and money;
  • Your beneficiaries may have to pay a hefty estate tax bill upon inheriting from you.

Executing a REVOCABLE LIVING TRUST allows you to avoid the pitfalls described above for people who either take the “do nothing” approach or who only execute a will. In addition to avoiding probate and minimizing estate taxes, a thoughtfully prepared revocable living trust empowers you to determine who inherits from you, how much they inherit, and when they inherit. This is particularly useful if you will have minor children or young adults as beneficiaries.

In the absence of an estate plan that says otherwise, a minor child beneficiary will inherit their full share upon turning eighteen years of age. As you can imagine, receiving a large inheritance at a young age could actually harm that child by perhaps railroading plans for continuing education, not to mention encouraging unwise spending practices. This is also often the case for young adult beneficiaries. For many young adults, they are set up for success if they receive an inheritance spread out over a number of distributions, e.g., 1/3 upon earning a Bachelor’s degree or reaching the age of twenty-five years, 1/3 upon reaching the age of thirty years, and 1/3 upon reaching the age of thirty-five years. For many young adults, wisdom and maturity develop with each successive distribution, and lessons are learned, thereby inspiring confidence in handling money and a setting them on a path toward a lifetime of success with handling finances.

An inheritance should help, not hurt, your heirs. A well-drafted estate plan helps you to accomplish this.

 

A Revocable Living Trust Allows You to Minimize Estate Taxes and Expenses to Your Beneficiaries.

In addition to minimizing expenses by avoiding probate and thus minimizing attorney and executor fees, a revocable living trust allows married couples to maximize their allowable estate tax exemption, which could save their beneficiaries thousands, if not hundreds of thousands of dollars in estate taxes.

The estate tax is a tax that is owed by the estate of a deceased person, but only if the person dies while owning assets in excess of a certain amount, known as the “estate tax exemption.” The estate tax exemption is set by the federal government, subject to change, and has varied significantly from the date of its creation. The following chart gives a snapshot of how the estate tax exemption amount and tax rate has changed in the last several years.

YearEstate Tax ExemptionTop Estate Tax Rate
1997 $600,000 55%
2002 $1,000,000 50%
2009 $3,500,000 45%
2011 $5,000,000 35%
2014 $5,340,000 40%
2015 $5,430,000 40%

In 2015, for example, anyone who dies with assets in excess of $5.43 million will be taxed at a rate of 40% on any assets above the exemption amount. However, a properly drafted revocable living trust will allow a married couple to avoid some, if not all, of the estate tax.* Additional strategies for minimizing and eliminating taxes can be identified during a meeting with an estate planning attorney.

A thoughtfully-drafted estate plan with a revocable living trust offers many benefits, both to the person(s) creating the trust and to the beneficiaries, including: avoidance of probate, planning for incapacity, maximizing flexibility and control of estate distribution to protect beneficiaries, and minimizing estate taxes and expenses.

*Disclaimer: The estate tax exemption and tax rates described here are for informational purposes only and should not be considered nor relied on in place of legal advice. You should seek advice from a qualified estate planning attorney who is licensed in the state of California to design a plan that fits your circumstances.