One of the top excuses people give for not setting up a Living Trust is that they’re afraid it will be too expensive. In this blog post, I’m going to tell you the truth – it is very likely that creating Living Trust will actually save you money. (You can also check out this video we made on the same topic.)
Here are 3 ways a Living Trust saves you money:
There’s a good reason many Californians create a Living Trust to avoid Probate: because Probate is expensive! Let’s say you die with only a Will (no Trust) or with no Estate Plan at all. Let’s say your estate is worth more than $166,250 in non-real property or $55,425 in real property. That means your estate will need to go to the Probate Court in order for your heirs to receive their inheritance. The Probate Court charges filing and other fees and also designates a statutory fee for the attorney and executor/administrator for their efforts. All of these costs add up to be quite expensive.
So how much does a Probate cost? It depends on the size of your estate. Let’s take a look at some examples.
Let’s say the total size of your estate is $500,000. That includes your home, your investments, retirement, life insurance, bank accounts, and anything else you might own. The statutory Probate fees on your estate will be $26,000 – and that is just to pay the attorney and the personal representative. There are additional filing fees and other associated costs on top of that, so let’s round that up to $27,000.
Now let’s compare the cost of a Living Trust-based Estate Plan, which is appropriate for most California homeowners. For a married couple, you’re looking at about $2,000-2,500 for a complete estate plan, including a Living Trust, Pour-Over Wills, Advance Health Care Directive, Powers of Attorney, and other supporting documents. After death, an average Trust Administration costs around $5,000, although the cost can vary.
Ask yourself: Is it a smarter financial decision for this estate to use a Trust (total estate cost of approximately $7000-7500) or go through Probate (total estate cost of approximately $27,000)? The answer is clear: a Trust-based Estate Plan will save this estate a lot of money.
What if your estate isn’t that large? What if it’s only worth, say, $200,000 in non-real property? Your estate will still need to be Probated because this amount is higher than the $166,250 limit. In this scenario, the statutory Probate fees for your estate will still be over $14,000.
Even factoring in the cost to administer the Trust after death, a Trust would still likely be a smart choice and save the estate thousands of dollars – not to mention time. An average California Probate last 9-18 months; a typical Trust administration lasts just 3-6 months.
Check out our Probate page under Practice Areas, where you will find a handy chart to determine what the Probate fees would be on your estate.
Now let’s talk about how a Living Trust can help you save money by avoiding taxes.
A trust offers significant savings on Capital Gains Tax compared with joint tenancy.
Let’s say you and your spouse purchase a home together in 1970 for $25,000. By the time both of you pass away in 2021, the house has appreciated in value and is now worth $350,000. Since you’re both gone now, it’s time for your Successor Trustee to sell the property. Capital Gains taxes will be owed based on how much the value of the property has increased since you purchased it.
If the title to the house was held as “Joint Tenants in Common”, your home would receive a HALF step up in basis for Capital Gains taxes. That means the estate will owe Capital Gains tax on $187,500, totaling tens of thousands of dollars.
If, on the other hand, your home was titled as you and your spouse as Trustees of your Trust, you will receive a FULL step up in basis. Your Successor Trustee can sell your house and owe $0 in Capital Gains taxes! Having a Trust can save your estate from having to pay Capital Gains taxes when you both pass away.
Federal Estate Tax isn’t as relevant for most of our clients as it used to be. In years past, estates that were around $1 million often used an A/B Trust to help avoid Federal Estate Tax. Today, the amount now sits at $11.4 million, which means that very few of our clients have to worry about this tax.
Still, if you’re married and your estate is valued at over $11.4 million, an A/B Trust continues to offer a shield against tax liability. Between Probate feeds and taxes, an A/B Trust could help you save over $5 million on an estate of up to $23.16 million in 2020. That’s an idea worth talking about!
Having a correctly drafted Living Trust can also save your estate money by preventing future litigation. When I first began this practice, my focus was on Estate Planning. In recent years, my focus has shifted to handling Trust and Estate Litigation, although I still take Estate Planning appointments here and there.
As a Trust & Estates Litigator, I have noticed that many of these cases start with one of two things: a badly drafted Estate Plan or a client who tried to change their documents without the assistance of a qualified Estate Planning attorney.
These issues can both be avoided by choosing an attorney who you trust to create or update your Estate Plan. Never attempt to alter your Estate Plan on your own, as this can invalidate your documents, create ambiguity, and lead to litigation. I wrote in depth about the dangers of DIY estate planning in this previous post.
How does avoiding litigation save your estate money? Consider that when a Trust or Estate is litigated, the attorney’s fees can cost your estate $10,000, $15,000, or much more. It’s possible for your entire estate to be eaten up with attorneys’ fees when a Trustee and beneficiaries go to Court to fight over a Settlor’s intentions.
As you can see, it is well worth the money to hire an experienced Estate Planning attorney you trust to set up or update your estate plan.
So there you have it – 3 ways that a Living Trust saves you money. It helps avoid Probate fees, helps avoid taxes, and helps avoid litigation. If you have any questions about Estate Planning or any of the information in this post, please don’t hesitate to contact us.