Will Buying a House Change My Estate Plan?
Buying a house for the first time is a significant step for most people. It’s also a big reason to have an estate plan in California. Probate is required if the decedent (i.e., deceased person) owned real property worth more than $66,000 (as of 2021). That covers most homeowners in California, which is why I generally recommend people to have a trust if they own a home in California. Let me explain homeownership and your estate plan a bit further:
Probate is when the government oversees the administration of a decedent’s estate. To put it another way, if an estate is in probate, then the Probate Court has to be informed of everything the personal representative (person in charge) is doing as they locate and get control of all the decedent’s assets. The Probate Court also has to give permission before anything can be distributed to the beneficiaries, and in many cases, before anything is sold. I have heard stories of the Probate Court blocking the sale of a house because the Court doesn’t think the buyer is offering enough or because a beneficiary protests the sale. This is just one reason why most people want to avoid probate if they can help it.
The most common way to avoid probate is to create a trust and have the trust be the homeowner (and any other high-value assets, like the money market account you put all your money into). A trust is considered a legal entity the same way a corporation is, so anything owned by the trust is not considered part of your estate (for probate purposes, anyway). So, having the trust be the owner and not you personally can keep your estate below the threshold where probate is required.
An important thing to note when you do this: most mortgage and refinance companies don’t like working with a house held in trust, so they will likely insist that the house be taken out of trust before they issue the loan. If they’re on top of things, they will take care of putting it back into the trust, but sometimes they miss this step. If this happens, the Probate Court will have to approve putting the house back into the trust after death. This is usually fairly straightforward, as long as no one objects, but it’s still much easier and cheaper to take care of it while you’re still alive.
I am often asked what to do when selling a home and buying a new one. Selling a house in trust is fairly straightforward – you can sell as trustee of your trust, so there’s no extra work required. However, buying a home can be trickier. Sometimes the title company will allow you to buy as trustee, putting the house directly into the trust, but sometimes they will refuse. If they refuse, then after the purchase is finalized, you’ll need to take the extra step of putting the house into the trust, just like you did with the previous home when you created the trust.
Homeownership and your estate plan can all be somewhat confusing. If you have questions or want to learn more, please feel free to email me at firstname.lastname@example.org.