Creating an estate plan allows you to protect your assets, ensure your loved ones are taken care of, and maintain control over how your estate is distributed.
A comprehensive estate plan is especially important for those with minor children, as it allows you to designate guardians and ensure their financial well-being until they are old enough to take care of themselves.
For many families, creating a revocable living trust is the best course of action (see details below). However, it is important to review your financial and family situation with an attorney to determine the best course of action.
What is the purpose of creating a trust instead of using a will?
Most people understand the importance of having a will to document their wishes for when they pass away. However, many are surprised to hear that, even with a will, the loved ones of the deceased are often required to go through a legal proceeding called probate, where the court oversees the transfer of the deceased person’s assets to their heirs or beneficiaries. There are a number of reasons why going through the probate process is undesirable:
- Probate is expensive. The amount of probate fees the attorney and executor of the will are allowed to charge is set in statute (Probate Code §§ 10800 & 10810) and is dependent on the size of the estate. For a $1,000,000 estate in 2024, the statutory fees for the attorney and executor would be $23,000 each. In total, the estate may face up to $46,000 in fees.
- Probate is a public proceeding, which means anyone can access information about the deceased person’s assets and how they are distributed as a matter of public record.
- The probate process is lengthy. Depending on the county, it can take one to two years for the heirs/beneficiaries to receive their full inheritance.
Many individuals use a revocable living trust to avoid probate. A revocable living trust allows you to appoint a trusted individual to oversee the distributions of your assets when you pass away, rather than having a judge oversee the distribution process as they would in probate. A trust is a signed document that details (1) how you want your assets to be distributed, (2) who you want to be in charge of the distribution of assets (the trustee), and (3) who you want to receive your assets (the beneficiaries). A revocable living trust has multiple advantages over probate:
- There are costs associated with creating a revocable living trust and having it administered, but those costs are usually lower than probate. With a revocable living trust, the trustee is entitled to a reasonable rate to administer the trust and typically has the power to seek the help of professionals to aid in the proper distribution of the trust assets. However, the administration of a trust is generally less time consuming and requires less procedural hurdles than going through probate. For that reason, using a trust in most cases is less expensive than probate.
- The assets in a trust can typically be distributed in a matter of weeks rather than months/years. When going through probate, the timeline of the distribution of your assets is based on the availability of the court, which is often dealing with a backlog of cases. Whereas the trustee should have near immediate access to the trust assets to start distribution.
- The administration of the trust is mostly private. The trust is administered privately by the trustee. In contrast, probate is a public proceeding, which means your financial information becomes accessible by anyone, including the government and disgruntled family members.
FAQs
What does the value of my assets need to be before it is worth creating a revocable living trust?
A revocable living trust is beneficial for estates that would otherwise be subject to the lengthy and expensive probate proceedings. However, certain “small estates” can take advantage of summary proceedings that are not as onerous or costly as probate. Estates consisting of personal and real property with a total fair market value of not more than $166,250 can be collected using an affidavit or a declaration. For “small estates” it may not be worth the time and expense to create a revocable living trust. However, estates worth more than $166,250 should strongly consider the use of a revocable living trust to avoid probate. Many California homeowners exceed $166,250 in assets based solely on the equity in their home.
Will creating a revocable living trust help me avoid taxes?
A revocable living trust generally does not provide advantages for avoiding federal estate taxes. However, individuals with a smaller estate than the federal estate tax exemption amount ($13.61 million per individual in 2024) are not subject to any federal estate taxes. California does not impose a separate estate tax. Prior to drafting your estate plan, it is important to consider whether there is a likelihood that your estate will be over the federal estate tax exemption amount, as there are additional planning considerations for those with assets over the federal estate tax exemption amount.
What steps are taken to administer the trust after I pass away?
After the grantor of a trust passes away, the successor trustee takes control of the trust assets and is responsible for distributing them to the beneficiaries according to the trust document terms. The process of distributing the assets is referred to as trust administration and involves several legal requirements. It is recommended that the trustee hire professionals such as an attorney and a tax professional to assist with the process. The administration process involves: notifying beneficiaries of the grantor’s passing, inventory of trust assets, determining creditor claims, paying debts and expenses, filing tax returns, distributing trust assets, and closing the trust with a final accounting. The trustee is a fiduciary of the beneficiaries and is required to act in the best interests of the beneficiaries, maintain accurate records, and communicate with them regularly.
What are the typical steps to create an estate plan?
- Discuss your estate planning needs with an attorney
- Fill out a questionnaire regarding your financial situation and preferences
- Attorney will prepare the necessary documents
- Review the documents to make sure it suits your preferences
- Sign the documents with a notary public
- Attorney will take care transferring real estate to the trust
- Transfer financial accounts and assets to the trust
How long does the estate planning process take?
The entire process may take anywhere from a couple weeks to a couple of months to complete depending on the complexity of the plan and how responsive all the parties are. The longest steps are the completion of the estate plan questionnaire and the drafting of the documents by the attorney. The other steps can be completed in a short amount of time.