Maybe. For most people, the estate tax is simply not a matter for concern. But a trust can save your family money even if you do not have to worry about the estate tax.
Like the boogeyman, the estate tax generates a lot more anxiety than it rightfully should. Currently, the estate tax comes into play only if you die with a net worth of more than $5,120,000. This exemption is scheduled to fall to $1,000,000 in 2013 unless Congress is able to agree on an amendment to the tax code. (I am not holding my breath.) But even at $1,000,000, this exemption acts as a “get out of jail free” card for most of us. The bottom line is that unless you are fortunate enough to have a net worth of more than $1,000,000, you do not need to set up a trust to avoid the estate tax.
But wait—there’s more. Even if (like most of us) your net worth is less than $1,000,000, you may want to set up a trust anyway to avoid a far more common, if less controversial, drain on your estate—the probate process.
“Probate” is the legal process under which the court divides up your property after you die. To put it bluntly, probate serves the same function as a vulture—it cleans up the mess and recycles what is left. Under California law, probate is generally required if a person dies holding virtually any interest in real estate except an interest that passes automatically to a survivor such as a joint tenant. Probate is also required if a person dies with a total of $100,000 or more in other “loose” assets (such as savings accounts, brokerage accounts, or personal valuables) that will not automatically pass to a successor. In general, “loose” assets do not include assets such as accounts held in joint tenancy, accounts with a pay-on-death beneficiary, or life insurance, because these will automatically pass to your beneficiaries. (However, this does not apply if you make your estate the pay-on-death beneficiary—in that case, probate may be required.) Vehicles registered in California also do not count as “loose” assets.
Your trust helps you avoid probate by serving as a vehicle to transfer your assets to your loved ones. Assets owned by your trust will pass to your loved ones under the terms of the trust. Therefore, they are not “loose” assets. As a general rule, you must be sure that your trust owns all of your real estate and that the cumulative total value of your “loose” assets is less than $100,000.
This can save your family a lot of money. The California Probate Code provides that the probate attorney who handles your estate is entitled to a percentage of the face value of your estate—not the net value after deducting liabilities. For example, if you die with assets of $800,000 and liabilities of $400,000, the fee will be calculated on the estate’s face value of $800,000, resulting in a statutory fee of $19,000. And if the probate attorney needs to perform any “extraordinary” services, such as selling real estate or filing a lawsuit against a debtor, he or she will also be entitled to hourly fees on top of the statutory fee. To make things worse, your executor is entitled to claim fees using the same schedule, essentially doubling them. Using the same example, this would bring the total fees to $38,000. Here is an illustration of how the fee schedule operates:
Total Statutory Fee
To be sure, your trust will not be free. There are some initial fees and costs involved in setting up your trust. And after you die, your successor trustee will probably need to retain an attorney to assist with administering the trust. The successor trustee may be entitled to compensation too. But overall, the fees involved in administering the trust are usually significantly lower than the fees and costs of probate. This benefits your loved ones by leaving more of the pie for them.
This is just a basic overview and is not legal advice specific to your situation. If you would like to speak with me about your situation, please email me at email@example.com or call 925-217-3255.