Revocable Living Trust – Essential California Estate Planning

| March 6, 2021 | 0 Comments

A potential client recently asked me if trusts were really necessary.  All of their assets were titled in joint name, so why go through the hassle and expense of creating a trust?

Let’s start with Probate. Probate fees start at four percent of the first $100,000 and reach $9,000 on the first million. Having your assets owned by a trust can largely avoid probate, so that alone is a huge financial incentive to use one. Probate is also a public court proceeding, so your trust can help keep your finances private by helping to avoid probate. Furthermore, if you have property in multiple jurisdictions (for example, in two states), a trust can really help cut the cost and complexity of passing these assets to your heirs.

Most living trusts are written so that the person or people who contribute assets to the trust, called the “grantors,” are also the ones who control the trust, called the “trustees.”  Thus, while a grantor may give up legal title to an asset, he or she may not actually give up control. A trust can hold title to assets like real estate, brokerage and bank accounts.  

Joint ownership bypasses a will or trust and passes the asset so titled directly to one owner at the other’s passing. For example, if a married couple owns their house as joint tenants with right of survivorship, the house will pass automatically to the surviving spouse at death without probate. But then at the second death, it could be subject to probate.

The surviving spouse is also at a tax disadvantage. When someone passes away and leaves property to another, the new owner gets to reset the cost basis to the value on the date of the original owner’s death. What’s important here is that if an asset is titled in joint ownership, each person owns half of the property already, so when one person dies, that person’s portion gets the step-up in cost basis, but the other half-owner may not.

A Trust solves this problem by taking title to the asset in the name of the trust and holding it as community property under the umbrella of the trust, allowing the entire asset to receive the step up in basis. This allows the trust to sell the asset with significantly less capital gains than if it were inherited through a joint title transfer.

A trust is also very useful during life. Wills and trusts may contain similar provisions for the handling and disposition of assets, but a will is only effective after the maker’s death, so it is useless if the maker is incapacitated. A living trust takes effect when it is signed and assets are titled in the name of the trust. This is particularly important in the event of incapacity, when another trustee can take over and manage the trust’s finances.

A trust can also help reduce estate taxes.  Anyone dying in 2021 can leave up to a total of $11,700,000 to any heirs (parents, siblings, children, friends, etc.) without estate tax.  But a married person can leave his or her spouse an unlimited amount with no estate tax.  While a couple’s estate will generally pass to the surviving spouse at the first death, at the second death there is only the one limited exemption from estate taxes. Using a specially designed trust, a married couple can capture the $11.7 million exemption at each death in addition to the unlimited marital exemption, thus protecting as much of the estate as possible from taxation.  For people with significant assets, this kind of careful planning is important to ensure that your heirs, and not the Internal Revenue Service, receive your estate.

Finally, I need to mention that there are many kinds of trusts, each with a special purpose.  Done properly, a trust can be a very useful estate management tool. They can also create huge problems if done poorly. These are important, complex documents, and should be prepared by an attorney who specializes in estate planning.

This column is prepared by Rick Brooks, CFA®, CFP®. Brooks is director/investment management with Blankinship & Foster, LLC, a wealth advisory firm specializing in financial planning and investment management for people preparing for retirement. Brooks can be reached at (858) 755-5166, or by email at Brooks and his family live in Mission Hills.

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