In What Ways Can a Trust Help Avoid Probate and Reduce Estate Taxes in California?

What is a Trust?

According to the State of California, a trust is an agreement to hold and administer property for someone else. That property can include money, cars, houses, and more. Each trust has the following basic elements:

• The creator of the trust, also known as the trustor or grantor
• The manager of the trust, also known as the trustee or fiduciary
• The person who will receive the property from the trust, also known as the beneficiary
• The property involved in the trust
• It’s important to note that when a trust is used as a probate avoidance mechanism, the trustor and the trustee are often the same individual or individuals during their lifetime and while they have capacity

What is Probate?

Probate refers to the legal process of transferring property after the owner dies. It is a court-supervised process that requires the administrator or executor of the estate to collect, manage, and distribute assets according to the instructions in the will or trust document prepared by the deceased. If no instructions were left, the court will appoint an individual to act as executor and guide asset distribution based on state intestate succession laws.

Probate can prove to be a lengthy and costly process for estate heirs. California probate fees are considered to be some of the most expensive in the nation. Fees for attorneys and executors are 4% of the first $100,000, 2% of the next $800,000, and so on.

How Does a Trust Avoid Probate?

Once assets are placed into a trust, the original owner transfers ownership to the trust. Correctly set-up trusts bypass the probate process, and the assets pass to the designated beneficiaries upon the trustor’s death. This is all done without court intervention.

If a trust is improperly set up or assets are not transferred correctly, probate may still be necessary. Assets acquired after the trust was formed but not added as part of the trust must go through probate and will be distributed according to the will. For this reason, an experienced Estate Planning Attorney, such as those found at Patricia Scott Law, will be able to ensure a smooth process for all loved ones involved.

What Types of Trusts Will Help Avoid Probate?

While there are many types of trusts available depending on specific estate plans, the two main types are revocable and irrevocable trusts:

• Revocable living trust: This type of trust is designed to avoid probate by providing an avenue for transferring assets directly from the original owner’s name into the trust. The benefits include less paperwork, less legal fees, and no probate proceedings or executor.
• Irrevocable living trust: This type of trust holds titles to property until the trustor’s death or incapacitation. It cannot be modified after its creation, so assets will be permanently outside the trustor’s control.

Other Avenues to Avoid Probate

• Payable-on-death designations for monetary accounts: This designation can be added to savings accounts, checking accounts, or certificates of deposit. This allows the original owner to retain control of the money within the account until death when the beneficiary can claim the money directly from the bank without probate.
• Transfer-on-death deeds for real estate: These deeds, which may be called beneficiary deeds, do not take effect until death. The deed may be revoked, and the property may be sold at any time.
• Transfer-on-death registration for vehicles: Vehicles registered this way will automatically go to the named beneficiary upon the death of the original owner without probate.
• It should be noted that while these designations may avoid probate, it is difficult to provide for unplanned contingencies and if such contingencies were to occur, a probate may still be the end result.

What are Estate Taxes?

Also called death taxes, estate taxes are levied on an individual’s estate after death and prior to the distribution of assets to any heirs. For individuals with substantial assets, estate taxes may take a significant portion of what monetary funds are left behind. However, proper tax planning and establishing a living trust offers several avenues for the reduction or elimination of estate taxes.

What Types of Trusts will Avoid or Reduce Estate Taxes?

Certain trusts may help to avoid or minimize the amount of taxes paid by an estate. Included in those trusts are:

• Bypass or Credit Shelter/Disclaimer Trust: This is typically used by married couples to maximize federal estate tax exemptions and works as follows:
  • Upon a spouse’s death, the trust is split into the “A trust,” or survivor’s trust, and the “B trust;” or, there is an optional split into a survivor’s trust and a “disclaimer trust” (B trust).
  • The B trust is funded to the limit of the deceased spouse’s federal estate tax exemption. The A trust contains the assets of the surviving spouse and any assets that exceed the deceased’s exemption limit.
  • The B trust’s assets can grow and benefit the surviving spouse but are not considered part of the surviving spouse’s estate. This allows for only the assets in the A trust to be subject to estate tax.
• Qualified Terminable Interest Property Trusts: This type of trust can be set up within a living trust. It allows the first spouse to place assets into the trust while providing income and/or principal to the surviving spouse. Once the surviving spouse passes, the assets of the trust pass to the beneficiaries and will potentially bypass additional estate tax. This can also be used to ultimately protect the deceased spouse’s descendants. 
• Charitable Remainder Trusts: This trust allows the transfer of assets into the trust, and the trustor may receive an income stream for a specified period, which will grant the remaining assets to a charitable organization after the time period. This provides a tax deduction and avoids estate taxes.
• Irrevocable Life Insurance Trusts: This type of trust does not consider death benefits as a part of the estate. The policyholder must relinquish control of the assets, but the benefits can pass to heirs without estate taxes.

Other Avenues to Avoid or Reduce Estate Taxes

• Gifting strategies: An individual may choose to gift a certain amount annually to proposed beneficiaries without incurring gift tax. This can reduce the size of an estate subject to estate tax.
• Unified credit: Setting up a living trust can ensure that couples utilize both of their exemption amounts, doubling the amount of assets protected from the estate tax.

Do I Need an Attorney?

Estate planning is a complicated process. Let us help simplify it for you. Call Patricia Scott Law today at 510-263-8808 or fill out a contact form for a consultation.