If you own a home in California, you'll need a revocable living trust to avoid probate.
What are Revocable Living Trusts and How Do They Work?
A revocable living trust is basically a contract with yourself. Your living trust is revocable, which means you can amend it or change it whenever you want.
Transferring your assets at your death is not simple, but it doesn’t have to be complicated or expensive.
Each state has its own laws to provide for the secure and reliable transfer of assets at death. Some state laws are more complicated than others. Most states require probate - a court process to appoint an executor, make sure family and creditors are notified, make sure all your bills and taxes have been paid, and then a judge will issue an order for the executor to distribute your assets according to your will or, if you didn’t have a will, as the state law provides by default.
What is the Probate Process in California?
In California, probate is required if you own real property worth more than $50,000, and/or bank accounts, investment accounts or other assets worth in total more than $166,250. This seems like a random amount, but it goes up periodically based on the cost of living. Retirement plans such as IRAs and 401ks won’t go through probate if you have named a beneficiary. Most people name their spouse or children as beneficiaries of their retirement plans.
Why Do You Want to Avoid Probate?
Most people who know something about probate want to avoid it. Probate is generally considered bad because it’s expensive, it takes a long time, and it makes your family information and assets a public record. Attorney fees, executor fees, appraisal costs and court costs are expensive.
And the attorney and executor fees are based on the gross value of your assets, not the net value. If you have a home with a fair market value of $750,000 and a $400,000 mortgage, the equity or net value of your home is $350,000. But the probate fees will be based on the $750,000 fair market value.
As an example, a $750,000 estate would cost $18,000 in probate attorney fees, $18,000 in executor fees, plus appraisal costs and court costs. Most likely, the fees and costs would be close to $40,000. Yikes.
If you own a home, your estate will need to go through probate when you pass away.
However, in California you can avoid probate with a revocable living trust.
What is a Revocable Living Trust?
A revocable living trust is essentially a contract you make with yourself. Your living trust is revocable, which means you can amend it or change it whenever you want. While you are alive and competent, you are the trustee, which means you control your living trust and your trust assets. Your living trust will name your successor trustees, the people you choose to manage the trust if you become incapacitated or when you pass away. It will also name your beneficiaries, the people you want to receive your assets when you pass away, and it will describe how you want your beneficiaries to receive their inheritance, whether through an outright distribution or in trust.
Your revocable living trust will use your name in its title. Typically we name the trust: “the Client Name Family Trust.”
How To Use Revocable Living Trusts to Avoid Probate
To avoid probate, you will need to transfer the title of your probatable assets to your trust.
For your home, we would prepare and record a deed transferring title from you, or from you and your spouse as joint tenants, to you, or to you and your spouse, as trustees of your family trust. So long as your home remains titled in your trust, it won’t go through probate.
The same applies to your bank accounts and investment accounts. If you have accounts worth more than $166,250, in total, you will want to change the title of the accounts to your trust.
If your probatable assets are in your revocable living trust when you pass away, your successor trustee will distribute your assets to your beneficiaries through trust administration, and avoid probate. Avoiding probate will save your family the fees, costs, publicity and hassles of probate. And if everyone gets along, the trust administration can be done smoothly and without court involvement.