For California residents, living trusts are a common estate planning tool. Due to high property values throughout the state, especially the San Francisco Bay Area, estate assets can easily reach millions of dollars. Trusts allow asset distributions to beneficiaries without going through the California probate process, avoiding additional costs and saving time when closing an estate.
Why Set Up a Living Trust?
In a living trust, as the person creating the trust (the grantor), you place your assets into a revocable trust. While you are alive, you are also the trustee and the beneficiary, and you control your assets. Because the trust is revocable, you can add or sell assets, change beneficiaries, etc. Upon your death, the trust becomes an irrevocable trust. The person(s) you named as your successor trustee(s) then assumes control and administers the assets for the beneficiaries according to your instructions.
The trustee(s) have a fiduciary duty to the beneficiaries. They must put the beneficiaries’ interests before their own at all times while following the mandates in the trust agreement. Many long-term or complicated trusts also name a trust protector, who advises, oversees, and can replace a trustee if necessary. This offers an additional layer of protection for the beneficiaries.
Taxes and Probate
Note that living trusts do not avoid estate taxes or disclosures on estates that exceed the current exemptions. Instead, trusts avoid probate and the associated costs. Additionally, there are a few other reasons families want to avoid probate for estate planning. Privacy is one consideration. Probated estates are public. All documents are filed with the court and subject to public review.
Furthermore, probate can be time-consuming. The probate process typically lasts from six months to two years. During this time, heirs may not be able to access the assets or sell any property. However, costs associated with probate in California are often the main consideration.
California Probate Costs
California state statute sets the fees for both the executor and the attorney at:
- 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,
- .5% of the next $15,000,000,
- and, for all amounts above $25 million, a reasonable amount determined by the court
For example, an estate with $2 million in assets (disregarding property debt), pays required fees for the executor and attorney at $33,000 each ($66,000 total). An executor who is also the spouse or an heir may elect to waive their fees, but the attorney fees are generally unavoidable.
Other Considerations
Several types of assets may pass outside of a trust. Often, assets such as retirement accounts and insurance proceeds can pass directly to a named beneficiary. This will also allow the avoidance of probate. However, assets without a direct beneficiary that are not correctly placed in the trust may still be subject to probate. It is vital that estate planning is done comprehensively to ensure that all aspects work together to fulfill your final wishes.
Further information can also be obtained on the California Attorney General’s Estate Planning – Wills and Trusts page and by discussing your own estate plan wishes with your financial advisor. Callahan Financial Planning has offices throughout the San Francisco Bay Area (including San Francisco, San Rafael, and Mill Valley) with a team Certified Financial Planner™ professionals that can help create an integrated estate plan for your situation.
Author: Rebecca A. Barnes, CFP®, EA
Rebecca is a tax and financial planning practitioner with Callahan Financial Planning Company, serving clients in San Rafael, San Francisco, and Mill Valley in Northern California, in Omaha and Lincoln in Nebraska, and in the Denver metro area in Centennial Colorado.