Why Living Trusts are Essential for California Estate Planning

Are revocable living trusts necessary? You may wonder why you should go through the hassle and expense of creating and funding a trust, especially if you are married and your assets are titled jointly. In this article, we will look at the reasons why a revocable living trust is essential for Californians with substantial assets.

Avoiding probate

Probate proceedings in California can be a slow, expensive, and confusing process. Probate fees start at 4% of the first $100,000 and reach $9,000 on the first million. Having your assets owned by a trust can largely avoid probate, and 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. 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.” While the grantors are living, they retain complete control over assets owned by the living trust, such as real estate, brokerage, and bank accounts.  

Joint ownership may not be enough

Joint ownership is often cited as an effective way to avoid probate. It is true that at the passing of a joint owner, joint assets will pass directly to the other owner. 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. The problem with this is the assets could be subject to probate when the second owner dies.

The surviving spouse may also be 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. However, when 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 living 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 gain than if it were inherited through a joint title transfer.

Living trusts may 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 as much of your estate as possible.

Living trusts are also 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. If one of the co-trustees is unable to act for themselves, the other co-trustee can take over and manage the trust’s finances.

Not all trusts are created equal

There are many kinds of trusts, and most are designed to serve a specific purpose.  A properly designed and well-executed trust can be a very useful estate management tool. On the other hand, a poorly designed or poorly executed trust can create huge problems for a family.

For instance, a trust designed for income tax avoidance or for asset protection may cause the grantor to give up control over assets and income. It can also cause very high expenses in the form of trustee fees, administrative costs, and taxes.

Trusts are important, complex documents, and should be prepared by an attorney who specializes in estate planning. A good estate planning attorney will take the time to discuss your objectives with you, assess your situation, and guide you to the best solutions for you and your family.

At Blankinship & Foster, we help you integrate your finances with your estate plan, your retirement planning, and your investment plan. We have a proven process called The Blankinship & Foster Way that helps bring Clarity, Confidence, and Direction to your finances. Contact us to learn more about how we can help you.

About Rick Brooks

Rick Brooks, CFA®, CFP® is a partner of Blankinship & Foster LLC and is the firm’s Chief Investment Officer. He is a lead advisor, counseling clients on all aspects of personal financial management. Rick serves on several boards. He is the Chairman of the Board of Girl Scouts San Diego, and also chairs the San Diego Foundation’s Professional Advisor Council. Rick and his family live in Mission Hills. Rick enjoys spending time with his family, theater, cooking, skiing, gaming and reading.

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