CalEstatePlanning

A living trust is a way to direct who receives your money and/or property after your death, usually without the need for a court probate process. Many homeowners especially can save money for their heirs/beneficiaries by having a living trust prepared. To understand the benefits of trusts, it helps to review the functions of wills and the reasons why, in California, if an estate’s value exceeds the probate threshold it will be less likely to need a formal probate process if the deceased person created a trust as well as a will. As of 2022 this threshold amount is $184,500 in most situations in California. The probate threshold is scheduled for cost-of-living adjustments every three years starting in April 2022. (Cal. Probate Code § 890.)

FunctionS of wills 

In the United States, a will is the traditional way to distribute property after a death. When an estate plan includes a trust, usually each “settlor” (creator of the trust) also creates a will, but in the form of a “pour-over will,” so named because, at the death of the settlor, the will scoops up miscellaneous assets that are not already in the trust or otherwise transferred on death (for example, through joint tenancy). In this type of estate plan, the will “pours over” those assets into the trust. The trust contains the core instructions for distribution of assets at the settlor’s death.

Unlike a trust, which gives instructions to a trustee, a will expresses the deceased person's wishes both to the probate court and to the executor who is named in the will by the testator (the writer of the will). A will may be used for many purposes, including to nominate executors, to select beneficiaries to receive assets, to nominate a guardian to take care of young children, and to give instructions about burial, cremation, or other memorial observances. Pour-over wills serve many of these purposes, even when they leave the main asset distribution process to the trustee of the trust.

A will can even instruct the executor to create a trust, with detailed provisions for asset management over time. However, if the will controls or distributes any large amount of money or property, it will likely need interpretation and approval from a judge in a court probate proceeding — whereas a freestanding trust more often does not need court review.

wills without trusts

A will without a trust remains a suitable estate planning tool for many Californians. This is especially true if there is no real estate to consider, or if real estate can be passed forward through deeds with automatic transfer mechanisms such as joint tenancy, community property, or California’s “community property with right of survivorship” hybrid mechanism. (However, for capital gains tax risks of real estate inheritance by co-owners, see “Tax advantage of living trusts” below.)

A will without a trust might be appropriate if a household’s major assets take the form of savings or investment accounts that can be transferred by naming beneficiaries or giving "pay on death" instructions to the financial institution. In these circumstances, an estate plan may be fine with three main documents: a will, a durable power of attorney for finances and personal care, and an advance health care directive. For more information about these possibilities, see “Additional Estate Planning Documents.” Each document in an estate plan must meet precise requirements to be valid under California law. Improperly executed documents can defeat the purpose of estate planning. It can be important to consult an attorney to get these papers right.

The main possible disadvantage of a will without a trust is the risk of needing a probate procedure. Also, trusts have some tax advantages, and they can help with managing assets for Medi-Cal long-term care eligibility. Further, a trust can enhance its creator’s control over future management of real estate, arrangements for others’ care, or financial assets that might be awkward to coordinate using separately arranged beneficiary listings.

Probate

Probate is a Superior Court proceeding to clear the title of an estate. It was originally designed to ensure that creditors got their money before the estate passed to heirs or beneficiaries. A California probate proceeding typically takes between nine months and two years.

In California, some types of transfer arrangements, including trusts, survivorship transfers between co-owners, and “pay on death” beneficiary listings, avoid the need for a judge to interpret a will or state inheritance laws, so assets transferred in these ways are often exempt from being counted as “probate assets”.

However, counting only “probate assets,” an estate must go to probate if it contains real property (land and/or buildings) that is worth more than $61,500 (Cal. Prob. Code § 13200). The same is true if the combined “probate assets” of all types, including savings, investments, and physical items, are worth more than $184,500 (Cal. Prob. Code § 13154).

For a household with substantial savings, “probate assets” ideally are reduced to a value below the probate threshold by placing most assets into trusts, while arranging for some investments, such as retirement accounts, to be distributed by financial institutions according to beneficiary listings or survivorship instructions.

The cost of probate

California Probate Code §§ 10800 and 10810 authorize executors and attorneys to claim probate fees out of the estate assets on a sliding scale keyed to the overall value of the estate. Where a house is part of the estate, the fee is calculated from its full market value as of the deceased person's death, regardless of whether it is mortgaged. For example, a house valued at $600,000 with a $200,000 mortgage still has statutory probate fees calculated from the full $600,000 value. The statutory probate fee to the attorney for a $600,000 estate is $15,000. Executors are entitled to claim the same amounts as attorneys for their services, separately from the attorney fees, but executors who are also heirs or beneficiaries of the same estate often choose not to claim fees.

Attorneys handling probate matters sometimes agree to fees below the formula amount when the estate administration is relatively simple. On the other hand, attorneys or executors who provide "extraordinary services" involving complex assets, inheritance disputes, or tasks such as selling complicated assets, may receive court permission to take higher fees than the statutory minimum levels. The amounts below do not include court fees or court-granted “extraordinary fees,” preparation of tax returns, or other miscellaneous expenses.

These are the California fee amounts set for estates’ executors or administrators (“the personal representative”) by the formula in Cal. Probate Code § 10800 — and for attorneys representing executors or administrators in probate proceedings under the formula in Cal. Probate Code § 10810:

Estate Assets         Fee

$100,000            $4,000

$200,000            $7,000

$500,000            $13,000

$1,000,000          $23,000

$1,500,000          $28,000

$2,000,000         $33,000

$5,000,000         $63,000

trusts and small estates

A written affidavit process and, if necessary, short-form court procedures exist to distribute assets of an estate that fall below the probate threshold (currently $184,500) if they are not already distributed through non-probate mechanisms such as “pay on death,” beneficiary listings, or survivorship on shared assets. Some people choose not to rely on this simpler process, but instead create a trust for smaller-value assets in order to assert more flexible control. A control advantage of a trust over a will is that, where an executor generally is asked to wrap up an estate and step out of the picture, a trustee may continue to manage an asset under the terms of the trust for many years after the settlor’s death.

What is a living trust?

Like a will, a living trust is an estate planning document giving instructions to manage and distribute the document creator’s (“settlor’s”) assets to heirs or beneficiaries, typically after the settlor’s death. Unlike a will, a living trust often can operate free of court supervision. Living trusts have been used in the U.S. since the Constitution was drafted. Many living trusts are revocable, which means they can be changed or revoked at any time. (In the case of a married couple, all or part of a trust may become irrevocable – that is, unchangeable – after the first death of a spouse.)

How a living trust works

Four main types of parties become involved in the life cycle of a living trust.

First is the “settlor,” who creates the trust and owns the property to be transferred into it.

Second is the “trustee,” or the person who manages the trust. Settlors creating revocable trusts for their own benefit usually name themselves to serve as the starting trustee(s), so that the settlor(s) control and manage their own trust fully at first. However, sometimes a settlor might name someone else as starting trustee, especially if the settlor expects to become unable to manage financial decisions or paperwork in the near future — for example, if the settlor is seriously ill.

If you are both the settlor and the trustee of a trust containing your own assets, and the trust remains revocable, you keep full control of your money and other property so long as you continue to serve as trustee.

A transition in control occurs when the third type of party enters the story: the “successor trustee.” If you die or become incapacitated, the successor trustee — a trusted person who you named when you created your trust — takes over as the manager of the estate. The successor trustee is often a close relative or friend, but may sometimes be an institutional trustee such as a bank's trust department.

The fourth and last type of party is the “beneficiary” — one or more persons who will receive the trust assets at the death of the trust’s settlor, or in distributions at the discretion of the trustee if the trust restricts a beneficiary’s access to trust assets for benefits planning or other reasons.

There may be more than one settlor, trustee, successor trustee, and/or beneficiary. The trust document defines the roles of each of these four parties. It outlines how the property that the settlor places into the trust shall be managed by the initial trustee (who at first is usually the settlor) and later how authority to manage the trust shall be transferred to the successor trustee to be distributed or managed for the benefit of beneficiaries.

Planning advantages of living trusts

Under a living trust, if you become incapacitated, a trust reduces occasions where court-imposed conservatorship might be sought to manage your property. A successor trustee — sometimes the same person acting under the combined authority of a durable power of attorney and a trust — can often manage the property without court supervision. For example, a trust and power of attorney together might give a successor trustee the power to reorganize an incapacitated person’s assets for benefits planning purposes.

People who need to provide for someone else’s needs, such as parents of young children, may also find a trust is helpful to give instructions in advance. The trust can tell the trustee how parents want the trust assets to be managed for their young children, how to distribute assets in light of children’s varying needs as they get older, and when the trustee should give each child partial or full distributions of income and/or principal from the trust.

If most of your assets are in your own revocable trust, including most of your banking and financial accounts, the trust becomes a central way to change instructions about distribution or management through a single amendment to the trust — which is simpler and more flexible than changing the instructions on each of several accounts. For example, if one of your beneficiaries has died, and you want to readjust the distribution of your assets as a result, you can make that change centrally by amending the trust.

Tax EFFECTS of living trusts

Tax advantages of living trusts can be substantial, though there are tradeoffs involved and the advantages are not always for the same reasons that applied in the 1980s or 1990s.

When a California resident dies leaving substantial income and property, the representatives of the estate and/or trust need to address four main types of taxes: estate tax; local property tax (if there is real estate); income taxes for the deceased person’s last year of life plus any outstanding tax issues; and federal capital gains tax on resale of inherited property. Among these four categories, estate tax has become less frequently important than it once was, but property tax and capital gains tax have gained importance.

A. Estate Tax

The lawyers who popularized living trusts in the late 20th century designed them mainly to reduce federal estate tax exposure, because the federal estate tax exemption threshold was then in the same range as the price of a middle-income family house plus a modest retirement account. However, for the last several years up through 2024, the U.S. estate tax threshold has been exceptionally high. It is $13.61 million per person as of this writing in 2024, so only households with exceptional wealth have reason to plan specifically for federal estate tax.

The estate of a U.S. citizen who dies in 2024 is only likely to owe estate tax if the deceased person’s total assets at death, combined with their total taxable gifts made during life, are above $13.61 million. For introductory details see the IRS estates page. At present there is no California state-level estate tax, but there have been recent legislative efforts to create one.

A living trust can substantially reduce estate taxes for couples whose estates do reach the current federal asset threshold. The unlimited marital deduction allows U.S. citizen spouses to pass unlimited assets to each other upon death, without federal estate taxation. A trust created by a married couple to manage their shared assets can make use of this advantage more effectively.

For further discussion of estate taxes for married couples, see “Trusts for Married People.”

B. Capital gains tax

Many families still have house titles in joint tenancy form because of the old-fashioned belief that joint tenancy succession is the cheapest way to pass real estate between spouses, or from older owners to trusted younger beneficiaries such as children.

Joint tenancy does allow title to transfer automatically from any joint tenant who dies, to the surviving joint tenant(s), as confirmed by documenting the death in a simple affidavit recorded on the title. However, this type of succession can have steep costs in capital gains tax, as well as procedural disadvantages, so that, for some people, estate planning via joint tenancy becomes costly rather than cheap. For several reasons, including some involving property tax, it is worth consulting a lawyer whether joint tenancy is a good choice.

1. Capital gains tax and survivorship for couples

For two members of a married couple or registered domestic partners who own a house together, sometimes it can be reasonable for them to set up a shared ownership mechanism that will transfer full ownership to the survivor of the two without either using a trust or needing a probate process. However, joint tenancy is not necessarily the best choice for this purpose, especially if the property is “appreciated real estate,” such as a house bought many years ago that now would resell for a much higher price. To minimize future capital gains tax for the surviving spouse, a couple may instead want to consider California’s special “community property with right of survivorship” ownership form, which, for spouses or registered domestic partners, combines the convenience of joint tenancy with the tax basis advantages of community property ownership.

2. Capital gains tax and ‘Transfer on Death’ deeds

The relatively new California “transfer on death” deed option is available for property transfers between people who are not in a formal marriage or domestic partnership, allowing for a property transfer without either a trust or a probate process, and a full tax basis step-up if the whole property is transferred to the beneficiary at the prior owner’s death. This can be a good option for some people but the process should be considered and advised carefully, as it is highly specific and inflexible. Any potential appearance of undue influence should be reviewed by independent counsel in advance.

3. Risks of giving a house to children via joint tenancy

Many parents have taken title to property in joint tenancy with one or more of their children. This is traditionally viewed as a simple form of estate planning to simplify future transfers. It’s true that, as each member of the joint tenancy group dies, the property can pass entirely to the survivors without a probate process — although a probate process may be needed at the death of the last surviving joint tenant.

The most likely problem with using joint tenancy to give property to children has to do with capital gains tax. A child who is placed on a property title as a joint tenant with parents, so that each owns 1/3 of the property, will only receive a partial basis step-up for capital gains tax purposes. If the starting joint tenants are one child and two parents, and the child outlives both parents, then after both parents are deceased, there is no step-up on the child’s original 1/3; there is a step-up for 1/6 of the appraised value as of the death of the first parent; and there is another, later step-up for 1/2 of the appraised value as of the death of the second parent. If the child then sells the property shortly after the death of the second parent, there will likely be capital gains tax on an amount between 1/3 and 1/2 of the profit from sale of the property.

There are also potential liability and control problems with making the children co-owners on the title, whether or not the family subjectively thinks of the parents as the only “real” owners. For example, if a child who is a co-owner incurs liability through an event such as a car accident, the house may be at risk to creditors. Co-ownership, even if it was meant to exist in name only, may also give estranged children more leverage if there is a family dispute about who has a right to live in the house.

C. Property tax

A trust does not in itself change local property tax, but a trust can help with flexibility in choosing how and when ownership changes, in ways that can be important for tax reassessment purposes.

Under the new Proposition 19 homeowner inheritance rules, it can be helpful for parents who own their home and have several children to leave the family home specifically to the child or children who would be most likely to reside at the property in the future. This may help to reduce the incentive for sibling-to-sibling buyouts, which are subject to reassessment, so it may help maximize use of the recently reduced exclusion from reassessment that can apply when at least one child lives at a family home received from parents.

As of February 16, 2021, Proposition 19 restricts the ability of a parent to pass on an existing low tax assessment with a gift of real estate to a child. The old Proposition 58 rule allowed Proposition 13 tax assessments to remain in place for a broader range of parent-child property gifts. However, the new rule only allows a limited property tax advantage for a parent-child transfer, only if the property is the personal residence of the transferor (usually the parent) before the transfer, and it is also the personal residence of the transferee (usually the child) after the transfer.

D. Income tax

Some trusts, including ordinary revocable family trusts, are taxed on their living creators’ Social Security Numbers at the same rates as for ordinary individual people. However, when a trust is irrevocable and is taxed on its own specially created tax ID number, it may pay higher taxes on its income than a living person would pay on the same income. But this is a complex area, better discussed with a lawyer or tax accountant in detail.