House Estate Document

Owners of Property Worth $166k-Plus: Consider a Trust

House Estate Document

If you own real estate like a house or investment property worth more than $166,000 in a state such as California, it might be worthwhile to consider forming a revocable living trust. 

That's because in many parts of the country properties valued around such a price tag can be swept up into prolonged probate administration proceedings that can last 18 months or longer, notes Jill Kinsey, an attorney at Albrecht & Barney in Irvine, Calif. "To be exact, the value of a house triggering the probate process has been raised to $166,250 in California," she says.

Previously, such a level was set at $150,000 in the Golden State. "Each state sets its own threshold for the amount that can pass to heirs or descendants without going to probate," Kinsey says. "In California, those levels are adjusted for inflation every few years. Most other states that I'm aware of don't typically adjust for inflation, though."

The next bump up in terms of home values requiring a probate process is due to come in April 2022 for California. "It's set to be adjusted every three years after that in this state," Kinsey says.

But another caveat she likes to remind homeowners about is that such rising thresholds for the probate process aren't limited to just real estate holdings. Any financial or personal asset without a beneficiary designation is generally included by courts when determining whether an estate must go through a probate proceeding, Kinsey points out.

"Courts look at the aggregate value of those assets," she says. "So ownership of a mutual fund, for example, would be applied to valuation thresholds in most states -- if, that is, those shares didn't come with a designated beneficiary or were held in a trust account." 

Different jurisdictions can vary in how they calculate estate values. According to Kinsey, states also tend to have varying timetables and notice requirements for the administration of an estate. 

"So it's very important for everyone to make sure they've designated proper beneficiaries for not only real estate they own, but also any financial holdings or related items of value," she adds. "Lack of these designations can really extend the entire administration process because it'll force an otherwise fairly routine passing of assets into extended probate proceedings."

A good way to avoid such legal headaches, tax and legal experts say, is by setting up a revocable living trust. As its name implies, this type of trust can be changed or torn up by "the grantor." Along these lines, a grantor -- essentially the person who's funding a trust -- can receive distributions from any income generated in these accounts during that trust's life. Beneficiaries get their share of property and related assets covered by a trust after the grantor's death. 

Certified Public Accountant John Dahlin points out revocable living trusts can help shield real estate and other taxes related to financial assets for beneficiaries. "At the date of the grantor's death, the beneficiaries get a step-up of cost basis for the trust's assets as well as protection against triggering probate proceedings," says the head of IFA Taxes, a division of Index Fund Advisors. 

Not protecting your assets by placing financial holdings into a revocable living trust can pack a double whammy of sorts. Besides prolonging the passing of estate assets, estate planning lawyers warn that not using such a trust can lead to lots of extra legal bills. "Paying attorney fees during probate proceedings can take a real wallop out of your pocket," Kinsey says. "In California, for example, statutory attorney fees are calculated based on the gross value of an estate, not the net equity value." 

Many people think they can avoid creating a trust by simply designating beneficiaries on their individual assets, suggests Kinsey, who works at a legal firm which specializes in estate planning. But she cautions this method can be time consuming, since refreshing information on each person and type of asset "amounts to a separate set of household bookkeeping" chores.

Depending on someone's personal financial situation, Kinsey also finds that revocable living trusts can provide greater legal flexibility for parents trying to break up distributions of their assets in different stages, whether by milestone or age. 

A revocable trust can be set up so that money and property can be passed to children -- and potentially grandchildren -- without those heirs taking a federal estate tax hit. These types of trusts utilize the Generation Skipping Transfer Tax (GSTT) exemption, which is a "use-it-or-lose-it" opportunity, says Kinsey.

The GSTT is an available tax exemption for transfers to individuals two or more generations younger than the donor, she observes. Such an exemption is also separate from the so-called death tax, officially known as the federal estate tax.

For deaths in 2020, the federal estate tax exemption amount is $11.58 million, meaning an individual taxpayer can pass up to $11.58 million to his or her non-spousal beneficiaries free of federal estate tax. Above that amount, your beneficiaries are likely to pay a flat 40% estate tax rate on those assets, according to Kinsey.

"People think because they have less than $11.58 million, they don't need to plan ahead and establish a trust," she says. "But what's missing in that type of logic is factoring into your plans how long and expensive a probate process can be -- as well as any costs associated with missing an opportunity to help to better protect your children in the future."

One note to keep in mind: In 2025, the current federal estate tax exemption level is scheduled to sunset. "Without additional Congressional action, that amount will drop to $5 million (plus any adjustments for inflation)," Kinsey says.  

Revocable living trusts are relatively easy and inexpensive to create, notes Brad Wiewel, an estate planning attorney based in Austin, Texas. "But that's assuming they're done correctly in the first place," he says. "There's nothing more expensive than a cheap lawyer."

You can always go online and fill out generic forms to set up a revocable living trust. But such fill-in-the-blank documents, cautions Wiewel, can lead to unanticipated errors and greater legal costs. He says a lack of professional guidance can prove "problematic" for issues related to not providing enough successor trustees to meet proper legal standards and not taking into account who might be considered as incapacitated or not in certain circumstances.

If you need help finding a lawyer in your area, check with IFA. It might be well worth your time to spend an hour with an estate attorney to make sure you're heading in the right legal direction to adequately protect your family's assets. Also, IFA's wealth advisors can assist in going over your beneficiary designations and questions about proper handling of important financial documents. Another resource is our in-house tax planning division. Feel free to contact IFA Taxes and Dahlin at: (888) 302-0765. His email is: [email protected]


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