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Living Trust?

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October 01, 2019 Words by The CREM Group
In deciding whether to create a living trust, it’s probably prudent to first understand the pros and cons of having a trust vs. not having a trust. If someone has not created a valid trust by the time they die, their estate must typically go through probate. Probate is a court-supervised process that facilitates the legal transfer of a decedent’s property to his or her beneficiaries. In California, the Probate Code states that probate estates of $150,000 or more must be probated if no trust exists.

In deciding whether to create a living trust, it’s probably prudent to first understand the pros and cons of having a trust vs. not having a trust. If someone has not created a valid trust by the time they die, their estate must typically go through probate. Probate is a court-supervised process that facilitates the legal transfer of a decedent’s property to his or her beneficiaries. In California, the Probate Code states that probate estates of $150,000 or more must be probated if no trust exists.

This leads us to the first and most significant “pro” of getting a trust; i.e. bypassing probate. And before jumping into this feature, I think its worth noting that it is a common misconception that probate is only required when someone dies without a will (aka when someone dies “intestate”). However, the truth is that probate is required in two situations: (1) when someone dies intestate, or (2) when someone dies with only a will. That being said, if there is a will, the probate court will ensure its instructions are carried out. And if a person dies intestate, the assets of the person’s estate will be distributed according to state law (see page titled “Who Gets What in California” for a detailed breakdown).

Now, lets discuss why avoiding probate (via a trust) is significant and advantageous. First off, the expenses associated with probate are very high. You typically must pay a probate attorney and a Personal Representative to navigate the estate through the probate process. Both of these individuals’ fees are dictated by state statute and are based on a percentage of the estate’s value. For example, a $1M estate would have to pay at least $23,000 to each the probate attorney and the Personal Representative to take the estate through probate. It should also be noted that a probate attorneys fees could actually end up being a lot more since they can charge “extraordinary fees” for work that is deemed to be outside the scope of a typical probate matter (e.g. coaching a real estate agent on how to sell a house during probate). Additionally, the estate will have to pay court fees and related expenses on top of everything else required to administer the estate through probate.

In addition to costs savings, avoiding probate also save an estate a lot of time. The probate process requires numerous documents and forms to be filed with the court and many of the requisite actions must be performed with court supervision. As a result, the transfer of property, from the decedent’s estate, to the intended heirs is often a lengthy process; must probates take a year or more.

Who Gets What in California

Another “pro,” aside from avoiding probate, is the degree of control and specificity that a trust allows a person when deciding what is to happen upon their death or even if upon specific events during their life. For instance,a person can predetermine: who they want to be the guardians of their children if said person dies while his/her children are still minors, how much a child/young adult can spend, at what age the children are to be in full control of their financial assets (e.g. 25 years old), or even who they want to handle their affairs if they become incapacitated (which avoids the need for a conservatorship – another court supervised process). The directives available to someone creating a living trust are numerous and flexible. This is important because I think the last thing people want is the state law to decide who gets what of a their estate; and this is exactly what happens when there is no trust and no will (see page “Who Gets What in California,” which shows where a person’s property goes in the absence of valid written instructions). And lastly, trust documents are private and do not become public record like probate proceedings. Most people don’t realize how beneficial this last feature is until they file a probate and are inundated with people calling them to offer their services.

Ok, now that we’ve looked at the “pros” of creating a trust, what are the “cons” of creating one? The most obvious disadvantage is the upfront cost; most trusts cost $2,500 or more to create. Next, is the administrative work and cost to fund a trust; e.g.you have to contact your bank, investment, insurance companies, etc. in order to update your accounts. Also, personal and real property such as cars,boats, and real estate must all be retitled, via preparing and recording new deeds.

There are other inconveniences as well. For instance, the settlor (creator of the trust) is no longer the actual owner of the assets;therefore, if he or she enters into contracts relating to his/her assets, they must be disclosed as trust assets. Banks and financial institutions may impose additional hurdles and administrative procedures if a loan or other funding is sought based on trust assets used as collateral. Not to mention, a person will typically amend a trust several times throughout their lifetime to reflect changes in their life and/or new objectives. Each amendment costs money. And lastly, administering a trust typically costs money after the settlor has died; this is to compensate the person is who ensuring the instructions of the trust are carried out.

Now that the pros and cons have been laid out, what makes more sense?In my opinion, the relatively small initial investment of money and time (by the creator of the trust) outweighs the many times larger cost and longer time commitment (by the estate and persons administering the estate). I don’t see the sense in spending money on attorneys, administrators/executors, and court fees/expenses if my other option could be to leave more to my beneficiaries. I know all too well the tasks and time commitment of administrators or executors and would prefer not to subject a family member or friend to such numerous tasks if they can be avoided. The sad truth is that the decision to create a living trust is often overlooked simply because people aren’t aware of all of the benefits it can have for them and their family, especially in light of all of the negative consequences of not having one. I hope this helps you and your family and if you have any questions please feel free to reach out to me, Mark Cianciulli, at mark@cremgroupre.com.

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