If you believe that all you need is a last will and testament, and that trusts are only for the wealthy, you are not alone, but you also may be wrong. There is a common misconception that a Will automatically transfers your property to your heirs. It isn’t that simple, especially when it comes to your children and grandchildren.
Wills only describe your wishes, they do not actually transfer your property. Before your home, vehicles and bank accounts can be transferred, your heirs will need to open a probate.
Probate is a complicated legal procedure with specific requirements and time tables. Even the simplest probate can take months to complete. Unless your total estate is under $150,000, this is not a DIY proposition.
How do you calculate the total of your estate?
The value of your home, vehicles, toys, cash, deposit accounts and personal property are all included in the total. Assets such as insurance policies, 401k’s, annuities and retirement accounts are not because they already name beneficiaries.
In California, the attorney fees are determined by statute and based on the total value of the estate. They are 4% of the first $100,000 plus 3% of the next $100,000 plus 2% of the next $800,000. This amount, plus court fees and probate referee fees comes off the top.
How does probate work?
Once the initial paperwork is filed, the court will assign a probate referee (who also gets a fee) to appraise your home and assign a value to your personal property (cash, investments, cars, toys, collections, etc.). Let’s assume your home is worth $350,000 and you have $200,000 in the bank and $50,000 in personal property. Your total estate would be worth $600,000. In this scenario, the attorney gets $15,000 ($4,000 plus $3,000 plus $8,000) off the top plus court filing fees. The kids still get a nice chunk of money and the house and the attorney pays for his next 3 day weekend.
But what if your bank account is anorexic or, worse yet, non-existent? To illustrate, we will use the $400,000 example without the bank account or personal property. Your kids will have to come out of pocket $11,000 to pay the attorney fees ( $4,000 plus $3,000 plus $4,000). If they don’t have that kind of cash laying around they will either have to sell the house or take out a loan to keep it.
There is only one way to avoid this, a living trust.
For many, the term itself invokes images of wealth, elitism, accountants and attorneys. Many feel that it is unnecessary for the average person. Nothing could be farther from the truth. In fact, If you own a house, the less cash you have in your estate the more you need a trust.
Unlike wills, trusts do not require a probate proceeding to be distributed to your heirs. The average cost of creating a basic trust is between $1,000 – $2,500. You can also create a simple trust quickly and easily for less than $300 online. Of course, this depends on the complexity of your situation. When in doubt, it is always better to consult a professional.
So what exactly is a trust?
A trust is a legal entity that survives after your death. Like a corporation, it exists on its own. While you are living you are the Trustee. You have complete control and ownership of all the assets in the Trust. You can make changes at any time, add or remove assets or even revoke the trust if you like.
You decide who the successor trustee(s) (e.g. your kids, grandkids, BFF) will be after you are gone. Like a will, the trust provides instructions on how your assets will be distributed to your heirs. The person you designate as successor trustee is bound by your wishes. The trust can be as simple or as complicated as the situation requires. This discussion is about a very basic family trust.
What is the process?
The basic idea isn’t any different than having a will – there’s just a lot more paper and legalese. You list your assets and designate the beneficiaries (who gets what). The key difference is that you need to transfer your hme into the trust to “fund” it.
The trust becomes the owner of your home. Don’t panic. You still control the trust.
Think of it more as a paper trail. A new deed is recorded transferring the title of your home from “Jane Doe” to the “The Family Trust of Jane Doe”. It’s that simple. It doesn’t matter if you have a mortgage or not. You are simply transferring your interest in the property to the trust that you control.
You can also transfer your bank accounts to the trust. This is especially useful if you become incapacitated and are unable to write checks. Your successor trustee will be able to easily step in to take care of your finances with little paperwork.
What happens when you are gone?
The trust owns your home and any other assets included in the trust (bank accounts, cars, coins, collectibles, etc.). Your successor trustee now distributes the trust according to your instructions. They can sell or transfer any property needed to do this.
As for the house, the Trustee records a deed transferring the property to your children. No courts. No probate fees.
That’s it. Much simpler than it sounds. So why doesn’t everyone have one? Because they seem complicated and scary – but they really aren’t.
Trust’s aren’t just for the wealthy – they are important for everyone. They ensure that your children can afford to inherit your house.
Disclaimer: this article is intended to familiarize you with the benefits and process of creating a trust for your family using a very simple example. It is not legal or financial advice. I am not a licensed legal professional or an accountant. You are advised to seek professional advice from your accountant or attorney.