Effective Estate Planning:
Probate versus the Living Trust



By Wilma Aarons
©1999, Petrie & Associates

THIS ARTICLE WILL deal with the pro's and con's of planning for distribution of your estate through a probate proceeding versus a living revocable trust, commonly called a "Living Trust".

A probate is a court proceeding which transfers the assets belonging to an individual upon his/her death to his/her named beneficiaries or heirs at law. Named beneficiaries are those parties identified in a person's Will to receive the decedent's property. Heirs at law are those parties who inherit property in the absence of a Will according to the laws of the State where the person dies or owns property. For example, spouses, children, parents and other relatives.

WHAT ASSETS ARE SUBJECT TO A PROBATE?

In California a probate proceeding is required to transfer your assets consisting of real or personal property having a cumulative fair market value in excess of $100,000.00 and standing in your name alone. Excluded from the $100,000.00 are automobiles, mobile homes, joint tenancy assets, assets in trust (including those in a living trust), life insurance benefits with a designated beneficiary, IRA'S and qualified retirement plans in which a beneficiary is named.

WHAT ASSETS ARE NOT SUBJECT TO PROBATE?

  • Joint tenancies
  • Assets in trust (including those in a living trust)
  • Life insurance benefits with a designated beneficiary
  • IRA'S and Qualified Retirement Plans in which a beneficiary is named.
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    WHY AVOID PROBATE?
  • TO SAVE MONEY
  • TO SAVE TIME
  • FOR PRIVACY
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    THE COSTS OF PROBATE

    The main costs involved in a probate proceeding are the executor's commission and the attorney's fee. Additionally there are the filing fees, publication costs, appraisal fees and other incidental fees. If the estate exceeds $650,000.00 there are potential federal estate taxes to be paid which are due nine months from the date of decedent's death. By way of example, consider the following three estates:

    Estate (1)

    Henry and Wanda are a retired couple living on social security and rent an apartment. They own an automobile valued at $20,000.00 and a motor home which they recently purchased for $50,000.00 cash so they could fulfill their lifelong dream of traveling throughout the U.S.A. Besides their household furniture and furnishings and modest jewelry, they have a savings account of $50,000.00.

    All their assets are in joint tenancy with right of survivorship. Upon the death of the first spouse, the surviving spouse inherits all the property as the surviving joint tenant. Will there be a probate upon the death of the surviving spouse? No. The estate is valued under $100,000.00 because the automobile and motor home are excluded from the calculation leaving the bank account which is worth only $5O,OOO.OO. Under current California law, the assets can be distributed 40 days after the death of the surviving spouse to his/her beneficiaries by furnishing the bank with the necessary affidavit.

    Estate (2)

    Same facts as above except that in addition to those assets mentioned above, Henry and Wanda own their own residence valued at $200,000.00. Again, upon the death of the first spouse, all the assets in joint tenancy will be inherited by the surviving spouse. But what happens upon the death of the surviving spouse? Since the estate is now valued in excess of $100,000.00, all the assets standing in the name of the surviving spouse alone must be "probated" including the automobile, furniture and furnishings, motor home, residence and bank account. The value of the gross estate is $320 000 .00. The attorney's fee and executor's commission are the same and are set by the California Legislature and are known as "statutory fees" as follows:

  • 4% on the first $15,000.00 3% on the next $85,000.00
  • 2% on the next $900,000.00
  • 1% on the next $9,000,000.00
    •

    The statutory attorney's fee on estate (2) would be $7,550.00 and the executor's commission would be the same, $7,550.00. The costs of administration would be approximately $1,000.00 for a total of approximately $16,100.00. The attorney and executor may also be entitled to fees for extraordinary services such as preparation of tax returns, sale of property and any litigation such as a will contest that may arise during the administration of the estate.

    Estate (3)

    Same facts as Estate (2) except that the residence is worth $400,000.00, securities worth $200,000.00 and savings of $150,000.00 for a combined estate of $750,000.00

    Again, upon the first spouse's death, the surviving spouse ends up with an estate worth $750,000.00. The attorney's fee and executor's compensation are approximately $32,300.00 and the costs of administration are approximately $1,500.00 excluding any fees for extraordinary services rendered to the estate. Additionally, since the estate is in excess of $650,000.00, the federal estate tax liability is between 34% and 50% of the excess over $650,000.00. In this case the federal tax liability upon the surviving spouse's death would be approximately $50,000.00.

    The time involved to administer a probate estate is a minimum of 7 months from the date of filing the petition to well over a year depending upon if there are assets that are difficult to sell or if there is a will contest filed in which case it could take years.

    Probate proceedings are public records. An inventory of your assets and liabilities are filed in court which information is available to the public.

    HOW TO AVOID PROBATE

    The two most common ways that people can avoid probate are by holding their property in joint tenancy or transferring their properties to revocable living trusts.

    In joint tenancy holdings, you give a current interest in your property to your beneficiary during your lifetime. The creating of a joint tenancy creates a risk of tax disadvantages in terms of the cost basis to the surviving party where property appreciates in value, and fails to provide for a contingent beneficiary in the event that the intended beneficiary of the joint tenancy fails to survive you. You also run the risk of subjecting your estate to the creditors of the person you add on as joint tenant.

    Revocable living trusts are commonly used to avoid probate.

    The costs saved by using a living revocable trust are the fees, commissions and costs of administration illustrated in Estate (2) and (3) above. Further, a married couple can shelter from estate taxes up to $1,300,000.00 worth of assets by the use of a living trust. The savings in estate (2) would be in excess of $11,000.00 besides the savings of time. If Henry and Wanda have children from prior marriages, a living trust can protect them from the surviving spouse disposing of all the property and excluding those children.

    The costs saved in Estate (3) would be in excess of $60,000-00. The disadvantage to a living trust is the expense to you during your life time of between $1000.00 and in excess of $2,500-00 depending on the complexity of your estate plan.

    The final decision depends on your philosophy. Whether to 1. allow your estate to be probated in the courts, or 2. distributed by a trustee of your choice who succeeds you as administrator of your living trust, or 3. by gift during your lifetime. This, of course, is a personal decision that each person must decide for him or herself. Some persons are not interested in saving their heirs the extra costs involved in probate proceedings, the inconvenience or the lack of privacy that they engender; while others prefer to reduce the economic burdens for their heirs and beneficiaries and are willing to pay the extra money for revocable living trusts during their lifetime to do so.



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