Probate is a Court proceeding whereby the Superior Court oversees various steps of the marshalling, inventory, and appraisal of the property of the deceased. The process includes identifying all known creditors, and advertising to unknown creditors to step forward and make claims against the Estate. These claims are then allowed or rejected, with allowed claims being paid, and rejected claims often resulting in lawsuits against the Estate for payment.
The Probate process is time consuming, often taking in excess of a year and a half; it is very costly resulting in attorney fees and costs of tens of thousands of dollars, often exceeding one hundred thousand dollars; and is a public proceeding inviting comment from not only family members, but legitimate and less than legitimate creditors.

A Probate proceeding is required to pass property from the surviving spouse to their family or children, and the person passing owns as little as $20,0000 in Real Property or $80,000 in Personal Property (gross value; not equity). Because the Probate proceeding is based on the gross value of the property the deceased owned at their death, it is almost impossible to own real property in California and have it avoid the Probate Process. As a result of the high value of property, literally every family in the state who owns a home can be exposed to this procedure.

2. Why do I want to avoid Probate?

Time, Money, & Privacy

The Probate process is very costly for your family, resulting in significant loss directly off the top of the Estate. These costs are often in excess of $50,000 and it is becoming more common to see bills in excess of $100,000.

In a typical uncontested Probate proceeding where the property of the deceased had a gross value of $500,000, the fees and expenses will be in excess of $40,000 on average. Where the gross value of the Estate is $1,000,000 the fees and expenses are in excess of $70,000 on average. Remember that these numbers are based on the gross value of the Estate, not the net equity.

The Probate process in very time consuming. The average time for the Probate process from open to close in California is in excess of 18 months. Many Probate Estates restrict the ability of the family to sell property until the Probate Estate is closed. These restrictions could have a significant negative impact on the family.
Like all other proceedings before the California Superior Court, the Probate proceeding is open to the public. Not only are creditors given notice, but also the Personal Representative of the Estate must place advertisements inviting persons who might have an interest in the Estate to come to the proceeding.

Many people go through great lengths to keep their Wills and Trust documents secret. It is no one else's business what provisions a person has made. The Probate proceeding throws all that out the window, and invites persons to make claims, which may in fact not be legitimate.

3. Does the Trust save Taxes?

The Revocable Living Trust can save a family of a married couple hundreds of thousands of dollars in Federal Estate Taxes when set up properly. Through the use of an A-B Trust both the husband's and the wife's lifetime federal exemption can be used to minimize or eliminate Federal Estate Tax. Without use of the trust, the typical couple loses the surviving spouse's exemption, creating a significant disadvantage.

For example, in 2004-2005 the lifetime exemption is $1,500,000 per person. In a typical scenario, the one spouse passes away without a trust, leaving all the property to the surviving spouse.

If the married couple had a combined Estate of $3,000,000 ($1,500,000 belongs to each spouse in a community property state such as California) the one half of the community property passes to the surviving spouse. The surviving spouse now has a $3,000,000 Estate. When that spouse passes, the family applies the decease's lifetime exemption amount of $1,500,000 leaving $1,500,000 exposed the Federal Estate Tax, currently at 48%. This results in a Federal Estate Tax to the surviving family of $720,000 ($1,500,000 x 48% = $720,000).

If the married couple had a properly funded living Trust, then the same situation looks like this:
The husband funds the Revocable Living Trust with his half of the community Estate ($1,500,000) and the wife does likewise with her half ($1,500,000). The Trust now owns all the property valued at a total of $3,000,000. Both spouses have full use and control over all the property. The remaining facts are the same.

The first spouse passes away, and has nothing in their Estate to pass (they have already made the transfer to the Trust). When the surviving spouse passes, there is nothing in their Estate to pass (they have already made the transfer to the Trust). Since all the Property has already passed to the Trust, there is no property for the surviving spouse's Estate to be taxed (0 x 48% = 0). In this scenario, the family saved $720,000 in Federal Estate Taxes.

Both spouses maintained full control over the property, and had full use and enjoyment of the property, just no Federal Estate Tax to the family after the passing.

4. How does the increase in the lifetime exemption affect my need for a Trust?

Presently the Federal Estate Tax Exemption is on an increasing scale, meaning that the limit continues to go up until it is phased out altogether. The current exemption is set at $1,500,000 per person for 2004 & 2005. The exemption rises to $2,000,000 in 2006, $3,500,000 in 2007 & 2008, and is unlimited in 2009.

However, the law has a Sunset Provision. This means that unless Congress extends or modifies the law, the law retires and reverts to its prior form. The debate on the reforming of the lifetime exemption had been brewing for many years. This sunset provision is a compromise between the political parties to get legislation passed. This means that if something in not changed prior to 2009, the lifetime exemption will revert to the 2002 level, or $1,000,000.

As the exemption increases, the Federal Estate Tax faced by families will go down. The amount owed is reduced from what it would have been just a few years earlier.

While taxation is an important part of Estate Planning, this change in the law does not affect the Probate triggers forcing a Probate proceeding, or take into account any of the other Planning objectives such as divisions to family members, charity, and reduction of infighting between relatives. The need for effective planning remains high.

5. When does a Trust have to be amended?

Typically a Trust needs to be amended when you want to make a change. Changes often occur, or are needed when there has been a marriage, divorce, birth, death, or a significant change in property status of the Trustor (party establishing the Trust). Other reasons to change might include changes in the law.

A review should be performed of the Trust on average every 18-24 months.

6. Does a Trust protect my Assets form a lawsuit?

No. This is a typical misconception. Revocable Living Trusts do not provide asset protection from liability issues. Because the Trustor (party establishing the Trust) retains the right to control the property, including taking it out of the Trust at their desire, the assets can be removed to satisfy a judgment.

Persons wishing to avoid liability might use any number of corporation models, and in some special instances may use an irrevocable Trust. The irrevocable Trust restricts movement of the property, even from the Trustor, and is not typically used for the average family due to lack of control of the assets.

7. Is the use of a Trust to avoid Probate or Taxes a loophole, which is going to close?

No. The use of the Revocable Living Trust has been around for several decades now. The state government and controlling the court system, save money when the affairs of deceased persons are handled outside the court. There is a major cost savings. The large fees involved in Probate proceedings go to attorneys, the personal representatives and the appraisers, not the government or courts.

With reference to the Federal Estate Tax Savings, Congress is intentionally raising the limit on the Federal Exemption, which lowers the potential Estate Tax, thus there is no incentive by the government to stop people from timely planning for the passing of their Estate.

8. Do I need a Will with my taxes?

Yes. A complete Estate Plan utilizes a Pour-Over Will to catch any property either intentionally or inadvertently not placed in the Trust during the person's life, and places that property in the Trust upon their death.

A word of warning, in that you do not want to rely to heavily on the Pour-Over Will to transfer property. Despite the transfer to the Trust upon the person's death, this is still property owned at death. If the amount passed is large enough, a Probate proceeding will be required.

9. Does the Will avoid Probate?

No. Perhaps the biggest misconception there is when it comes to Estate Planning is the incorrect belief that if a person has a Will their Estate will not pass through Probate.

A Will by itself, is a guarantee that the Estate will pass through Probate prior to distribution to the heirs.

A Will can only pass property owned by the deceased at their death. Thus if the decedent owned in excess of $20,000 of real property or $80,000 of personal property that property will have to pass through the Probate proceeding.

10. Can I re-finance my home when it is in the Trust?

Yes. You are the Trustee of the Trust, and in charge of the Trust property. If it makes sense to re-finance the property, then as Trustee you can do that.

11. Does putting my home in the Trust change my Property Taxes?

No. Placing one's home into their own revocable Living Trust is not a trigger for re-appraisal in terms of the property tax.

12. Can I spread out payment of my Assets to my Children?

Yes. Many people choose to spread out payments to their young adult children to insure that their will be enough money for college, purchase of a home, start of a new business, etc. Many people also spread out the payment hoping that the children will mature into the inheritance, rather than spend it all in one shot.

Many young adults are simply not ready to take on the responsibility of having tens of thousands, or hundreds of thousand of dollars at their disposal. The Trust can set up rules and persons to help watch over the young adults to insure that the inheritance is there for as long as the Trustor wants it to be there.

13. What do I do if my Children are Minors?

It is very important for parents of minors to take the time to spell out specifically where the children will go if the parents pass. This form is called the Nomination of

Guardians, and it is the only method by which the parent can inform the Court after they have passed what their wishes are. It is also important to consider how to distribute money to a child or young adult to insure the money is wisely spent and will be there when the child needs it.

14. Can the Trust be attacked?

Yes. Any Trust or Will can be attacked, although success on the attack is rare. When these documents are drafted by a competent attorney, the basis for the attacks are often taken away, e.g., that Trustor lacked the capacity to engage in said Trust or Will; or Trustor acted under an undue influence and left the property to someone exerting control of Trustor.

A competent attorney will remove any thought that these situations are occurring during their interview process, insuring the capacity of Trustor.

15. How do I keep my Children from Fighting?

There is only one way to keep children from fighting over the Estate - you must clearly spell out who is to get what, or what percentage. A COMPLETE Trust and Estate Plan will specify how the property is to be distributed, when the property is to be distributed, and who is in charge of that distribution.