Estate Planning Essentials: The Living Trust
First, the nuts and bolts. A trust is an arrangement where a trustee holds the right to property for the benefit of a beneficiary. The person who establishes and funds the trust is the grantor (also called the “trustor” or “settlor”). The person who controls the property in the trust for the benefit of a beneficiary is the trustee. The trustee has a fiduciary duty to always act in the grantor’s best interest. The person who the grantor appoints to manage the trust assets during their lifetime or distribute the trust assets after their death is the successor trustee. Commonly in a living trust, the grantor, trustee, and beneficiary are all the same person.
Probate is the legal process that takes places after someone dies. It includes validating the will, identifying, inventorying, and valuing the decedent’s property, paying debts and taxes, and distributing the remaining property as the will or state law directs. If the decedent had a will, then the will determines the transfer of property; if the decedent didn’t have a will, then the laws of intestate succession determine the transfer of property. In California, intestate succession is determined by the state legislature and set forth in the Probate Code. As such, the decedent has no choice but to leave their property to the persons in the order listed in the Probate Code, even if it’s not what they would have wanted.
Enter the living trust. A living trust is a type of trust that the grantor establishes during their lifetime (as opposed to a testamentary trust which takes effect at the grantor’s death) and one that they may amend, revoke, or terminate at any time (as opposed to an irrevocable trust). A living trust essentially acts in place of a will, and trust assets pass to beneficiaries outside the probate process. This works because probate only includes property held in the decedent’s name, whereas property in the living trust is held in the trust’s name. The number one reason people create living trusts is to avoid probate.
Probate fees are a significant concern. As of April 1, 2022 in California, probate is required if someone dies owning $184,500 or more worth of assets. Excluded from this $184,500 are financial accounts with designated beneficiaries, transfer-on-death (TOD) accounts, or any assets owned in joint tenancy or as community property with the right of survivorship. California has the following statutory fee schedule set forth in the Probate Code for the attorneys and executors representing the estate, which cover the probate duties mentioned above.
4% of the first $100,000
3% of the next $100,000
2% of the next $800,000
1% of the next $9,000,000
0.5% of the next $15,000,000
The probate fee calculations may have to be done twice, once to calculate the attorney’s fee and once to calculate the executor’s fee. Here are example probate fee calculations based on the gross value of an estate.
$500,000 $13,000 x 2 = $26,000
$600,000 $15,000 x 2 = $30,000
$700,000 $17,000 x 2 = $34,000
$800,000 $19,000 x 2 = $38,000
$900,000 $21,000 x 2 = $42,000
$1 Million $23,000 x 2 = $46,000
$5 Million $61,000 x 2 = $122,000
The gross value of the estate is the full market value of the assets of the estate, and the probate court does not use debts or encumbrances to offset this. For example, if a house is appraised at $900,000 but has an outstanding mortgage of $400,000, the house is still valued at $900,000 for the purposes of calculating probate fees. Furthermore, if the house is sold during probate, the attorney and the executor may be entitled to receive extra compensation for their time and the costs incurred in the sale.
The probate process is slow and can drag out the distribution of the estate, which is undesirable for obvious reasons. Probate can easily take a few years and most beneficiaries would prefer not to wait that long. By contrast, a living trust can be distributed in accordance with trust instructions at any time after the grantor's death, without having to get permission from the probate court. This is a much more expedient and straightforward process.
Privacy may be an additional worry. All documents related to the transfer of the decedent’s property must be filed with the probate court and as such become a matter of public record. This includes assets and their values, identification of beneficiaries, and any conditions on the receipt of assets. By contrast, a living trust is a private document, and nothing becomes part of the public record. This is how a living trust can protect the decedent’s privacy and the privacy of their beneficiaries.
Outside of avoiding probate, there are ancillary benefits of a living trust. A living trust can protect the grantor if they become incapacitated, as the successor trustee can step in and manage or distribute the trust assets for the grantor’s benefit. This is particularly important for people who are single or who don’t have children. A living trust can also provide management of property for young beneficiaries by naming custodians and including instructions for the creation of subtrusts. These provisions can protect minor children until they are old enough to manage their inheritance themselves, or protect adult children who are not responsible from themselves.
If you live in California and own a home, the math is irrefutable. As of August 31, 2022, Zillow lists the typical home value in California as over $775,000. If a living trust costs approximately $3,000, then establishing one will save you over $30,000 based on that asset alone. While talking about estate planning with an estate attorney may be a gloomy prospect, paving the way for beneficiaries to receive more of their inheritances efficiently, privately, and responsibly makes complete sense.