Do You Need a Trust?
We are starting this blog to share enough fundamentals about California elder law and estate planning to empower the reader to know what questions to ask, which legal services to seek out, and why it can be worth the time, effort and money to hire an attorney rather than relying on Counselor Internet.
You probably recognize that you will eventually need a will. You might already have one that you drafted when you became a parent or faced a brush with mortality or the loss of a loved one. We’ll explore wills in greater depth in another post, but here we’d like to zero in on arguably the most essential—and confusing—component of California estate planning: the trust. Whether or not you need a lawyer for your estate planning may hinge on whether or not you need a trust (or to amend an existing trust).
You may have heard that “if you own a house, you need a trust.” That’s generally good advice, but let’s dig deeper. For most Californians, whether or not a trust is necessary depends on the anticipated value of your “probate estate.” Your estate is everything you own. Your probate estate is the portion of your estate that a probate court will be involved in distributing after you die.
For the purpose of “estate planning”—the process of designating, in legally recognized writings, who will receive your property when you die—it helps to mentally allocate your property into three buckets:
Bucket 1 - Property that will pass '“by operation of law or contract,” meaning it can be distributed directly to your beneficiaries before anyone even looks at your will or trust. Examples of property that passes by operation of law include real estate, bank accounts, and other property owned by “joint tenancy” and real estate that is community property. Examples of property that passes by operation of contract include retirement accounts or other property for which you have completed paperwork that says something like “transfer on death (TOD)” or “payable on death (POD)” or “beneficiary designation.”
Bucket 2 - Property held in a trust. The terms of your trust will dictate which of your belongings are owned by, or “held in,” that trust. This can include almost anything, but some typical holdings are real estate, financial accounts, valuable personal property like fine art, and interests in instruments like life insurance policies.
Bucket 3 - The probate estate, which includes everything a person owns upon their death that does not fit in either of the previous buckets. It is this portion of your estate that the probate court will distribute.
In California, if the value of your probate estate is below a statutorily-set amount—as of this writing, $184,500—then that probate estate is considered a “small estate” and its distribution is governed by an informal probate court process that can be handled without a lawyer and is faster and far less costly than the formal probate court process. If your house is part of your probate estate, then your probate estate is almost certainly worth more than $184,500 and therefore will be subject to the formal probate court process. But if your house is held in a trust, then it is not part of your probate estate.
If your probate estate exceeds $184,500 in value and therefore must go through the formal probate court process, the representative of your estate will want to hire a probate attorney. (Although possible, it is very difficult to navigate the process without one.) The fees charged by a probate attorney are set by statute. Under the fee structure mandated by California Probate Code Section 10810, a probate estate worth $500,000 will net the attorney $13,000; for a $1,000,000 estate, a $23,000 attorney’s fee; for $2,000,000, the attorney’s fee will be $33,000. The attorney’s fee is the most onerous cost associated with the formal probate court process but not the only one. The court itself charges various fees, and an accountant, an appraiser, a land surveyor or other experts often must be paid as well.
So it behooves every Californian whose combined property value exceeds $184,500—whether that property includes real estate, cash, investments, business interests, personal property or anything else—to keep most of their property out of Bucket 3, their probate estate. Bucket 1 can be extremely useful, but many Californians (including most homeowners) can benefit from Bucket 2—a trust.
Of course, trusts have many other functions in estate planning beyond probate avoidance. And there’s more to estate planning than trusts. And there’s more to elder law than estate planning. In future posts we will explore issues like power of attorney, Medi-Cal planning, establishing sub-trusts for loved ones likely to outlive you (like special needs trusts and pet trusts), and the estate tax.
