Whenever I meet with a new prospective client, I give them the opportunity to ask questions. A very common question is “Do I need a trust?” Rather than give the classic lawyer answer (“It depends”), I tell them that most people who create a trust do so for one of two reasons:
- To control how and when young children receive their inheritance. Most people are not comfortable with the idea of their child receiving their full inheritance at age 18, which is what typically happens without a trust. Usually I don’t need to explain this point further.
- To avoid probate.
This second reason usually prompts the follow-up question: “What is probate (and why do I want to avoid it)?”
In short, probate is the process where the government oversees the distribution of the estate. The idea is to make sure that everything goes where it is supposed to, as determined by the deceased person’s will or, if there is no will, by the California Probate Code (a set of laws that act as a default estate plan for everyone that didn’t come up with one themselves). There are several reasons why probate is not considered ideal:
- Probate can take a very long time to close. The Probate Court must approve every payment and every action, and there is often a hearing before approval is given. It often takes months, if not longer, to get approval for each action. There are also mandatory waiting periods built into the process – for example, creditors must be given a certain amount of time to submit a claim before any distributions can be made to the beneficiaries. It usually takes years for a probate to close.
- There are mandatory fees associated with probate. These can take out a solid chunk out of the estate, and are much larger than the fees for privately administering a trust.
- Everything that takes place in Probate Court is public record. All anyone has to do to find out about your personal business is go down to the courthouse and look through their files. This is how journalists stay on top of the latest developments in celebrity estate cases.
Probate is required if a person’s estate is worth more than $150,000 (which, in California, includes anyone that owns a home).
So how does a trust help you avoid probate?
A trust is considered its own entity in the eyes of the law, rather like a corporation. Like a corporation, it can own property and hold bank accounts in its own name. Anything owned by the trust is not considered part of your estate (for probate purposes, anyway). So, if you make your trust the owner of your house, your savings, and your other high-value assets, you can keep your estate below the $150,000 threshold and keep it out of probate.
If you would like to learn more about probate, how it works, and how to avoid it, you are welcome to email me at firstname.lastname@example.org.