Avoiding probate with a trust
Do I have enough assets to need a trust?
By David E. Edsall Special to the Acorn

If you wish to make it easy and inexpensive for your loved ones to settle your estate upon your passing, you may need a revocable living trust.

Many believe that if they just own their home with few other assets, they are not "wealthy" enough to justify having a trust. However, preparing and funding your trust with these assets will allow your children to avoid the court-supervised process called probate.

In probate, if the deceased simply left an average home valued at $600,000, the executor and attorney fees incurred in settling the estate is at least $30,000, and it takes on average approximately one year to conclude probate and distribute assets to the heirs.

In contrast, when an estate is settled under a revocable living trust, although it is advisable that your children consult with an attorney to administer your trust estate, your children can perform most of the required duties without court supervision, and therefore much more economically. Returning to the previous example, a trust estate with only the $600,000 home as an asset can be resolved, and the home distributed to the beneficiary, within weeks at a fraction of the probate cost. It's important to note that larger trust estates can take longer and vary based on the specific circumstance.

Interestingly, many individuals attempt their own estate planning by placing their house in joint tenancy with the right of survivorship with a child. The intended result of avoiding probate can be achieved; however, there are other unintended consequences.

For example, placing your adult child on the title to your home as a joint tenant creates the following risks: If the child has financial problems resulting in bankruptcy or is sued, the child's interest in your home is at risk to creditors. Additionally, if you change your mind and wish to remove your child from the deed, you need your child's signature on the deed to convey title back to you.

Moreover, placing your property in joint tenancy can result in a capital gain tax liability, which could have been totally avoided by placing the home in a trust. In fact, the tax liability created can be greater than the probate cost you were trying to avoid.

In the example of the $600,000 house, if it was purchased many years ago for $100,000, upon inheriting the property your children will receive a "stepped up basis," raising the basis for capital gains upon a subsequent sale to the value of the home as of your date of death. Therefore, if your children then choose to sell the home at the date of death value of $600,000, they will incur no capital gains tax.

To the contrary, if your child is on title as a joint tenant, they will avoid probate, yet will only receive a stepped up basis on your one-half interest in the home.

Consequently, in the above example, upon selling the home, your children would incur a state and federal capital gains tax of approximately $60,000.

Beyond the scope of this article your tax adviser may advise you on how to defer this tax.

Every person and family circumstances are different, and it is always best to consult with a professional trusted adviser. The best way to locate an adviser is to speak with friends and acquaintances that are happy with their advisers, get a referral, then interview a couple of advisers and select yours.

Edsall, a St. Johns Hospital Foundation board member, is an estate planning and business lawyer and has been a Camarillo resident for more than 20 years.