House Estate Document

Owners of Property Worth $150k-Plus: Consider a Trust

House Estate Document

If you own real estate like a house or investment property worth $150,000 or more 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 of that value or more can be swept up into prolonged probate administration proceedings that can last 18 months or longer, says Jill Kinsey, an attorney at Albrecht & Barney in Irvine, Calif.

Also, paying attorney fees during probate proceedings can take a real wallop out of your pocket. In California, for example, "statutory attorney’s fees are calculated based on the gross value of an estate, not the net equity value," warns Kinsey, who works at a legal firm which specializes in estate planning.

Still, some families might try to avoid any extra work to create a trust by simply designating beneficiaries on each of their individual assets. But legal experts suggest this method can be time consuming as well, since refreshing information on each person and type of asset held amounts to a separate set of household bookkeeping chores.

"Simply listing beneficiaries as your primary way of protecting your assets," says Kinsey, "can also limit your long-range wealth planning options in the future."

Revocable living trusts allow parents to break up distributions of their assets in different stages, whether by milestone or age. "Alternatively, they can choose to hold their assets in a trust to protect their kids in the event of a divorce or lawsuit against that child," says Kinsey. 

Such a 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, notes Kinsey.

The GSTT is an additional tax 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 2018, the federal estate tax exemption amount is $11.18 million, meaning each individual can pass up to $11.18 million to their 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 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."

Revocable living trusts are relatively easy and inexpensive to create, points out 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.