Site search
sponsored by
Home
News
My recent survey of public records yielded a very surprising conclusion: Many Tahoe/ Truckee property owners are headed for probate. Probate is the expensive and time-consuming process of holding your assets in court after you die. Properties listed in the names of individuals usually have to be probated.
My survey showed that many homes in the Lake Tahoe area are held in the names of individuals. There are even some lake front estates valued in the multi-millions of dollars owned in the name of just one individual. This is baffling to me. Why don't these property owners have living trusts? Perhaps the property was refinanced and the loan company took the property out of a trust to obtain the loan and after getting the new loan the owner failed to deed it back to the trust. It is hare to imagine that after all of the articles, books, and seminars over the last 30 years they still don't know that living trusts can avoid probate?
Probate is a real problem. If an individual dies holding property in his or her name it must go through a court proceeding called Probate to get to the heirs. In California, attorney and executor fees for Probate are statutory. They are figured on the gross estate; don't subtract mortgages or debts. On an estate of just $500,000, the combined fees would be $20,600. On an estate of $1 million, the combined fees would be $40,600! In Nevada, the attorney bills at an hourly rate which ends up being comparable to California fees and the executor has a statutory rate much the same. Since real property values have gone up so much, even an average house around the Lake can cause a huge probate bill.
Probate also takes a long time. The notice requirements and court hearings generally mean that a probate will last at least six months and frequently over a year. Often we are asked, "How will I know if I need a Probate?" There will not be a policeman knocking at your door to tell you to probate. Instead, it is very practical: You won't be able to sell an asset which is in the name of a deceased person. It may be years later when you try to sell a piece of property and the escrow and title people tell you to go to probate court.
It is a misconception that a will avoids a probate. The will is the document designed for and used in a probate. The original is lodged with the court and the terms of the will govern how the assets will be distributed. We like to say, "Where there's a will, there's a probate!"
Often people mistakenly think holding property in joint ownership with another person where it automatically passes to the survivor is the way to go. There are many pitfalls with joint ownership. The first is that it is a short-term estate plan. Once the first party dies the survivor has the same problem of how to transfer the property to the heirs without probate. The second problem is when you put another person on your title, their creditors become your creditors. A third problem is capital gains taxes. When property is inherited, there is a "step-up" in tax basis. If you buy an asset for $10,000 and you inherit at $110,000, you can sell it and pay no taxes. If you are own or are given the same asset with the same numbers, you have to pay $15,000 in capital gains taxes. With joint ownership you only inherit 1/2, so you would pay $7,500 in taxes. The answer is you want to let your loved ones inherit assets, instead of giving them a tax bill with joint tenancy. The problem is probate. The solution is the living trust.
Even spouses are better off owning the house in a living trust. The surviving spouse only inherits 1/2 in joint tenancy (and only gets a 1/2 forgiveness of those taxes). In the living trust, if the house is community property, there is a full forgiveness of taxes and probate is avoided too. That's how you have your cake and eat it too!
You need four documents:
1. A living trust avoids probate (your assets held in court after you die), guardianship (your assets held in court while you are incapacitated) and some taxes (some capital gains and some estate taxes in some cases). If you haven't got a living trust yet, where have you been the last thirty years? Time to get one!
2. A pour-over will takes assets you forgot to put into your living trust and puts them into the living trust after your probate.
3. A durable power of attorney for health care gives someone power to make health care decisions for you if you can't, and says what some of those decisions should be.
4. A durable power of attorney for assets authorizes someone to make asset decisions if you can't for assets you forgot to put into your living trust or for assets which can't be held in a living trust like retirement plans and air miles.
If you have all those documents, we need to change them because of HIPAA. This is a new privacy act called "The Health Insurance Portability and Accountability Act" that prevents the release of medical information to anyone, even your spouse, without a waiver. First, we need to amend your living trust so your "successor trustee" can get medical information to show that you are incapacitated. Second, we need to prepare a new health care document so your "health care agent" can get medical information to make the right decision if you are incapacitated. Third, we need to prepare a new durable power of attorney for assets so your "attorney in fact" can get medical information to show that you are incapacitated. In all of these documents we will have a succession so that there will always be someone ready to serve.
While we're making these changes, you might as well make other elective changes because there will be no extra charge. Take a look at who you have in charge and consider making changes. If you have moved since you signed your documents, let's put in a clause changing your residence, the "situs," or home of the trust, and the applicable law. This will keep other states from taxing the trust after you die. Take a look at who gets your assets in your old documents and make sure you want it to be that way.
In conclusion, its a very good idea to go over your estate planning documents with a professional every few years. By all means, title your real estate in your living trust!
If you have any questions about the information in this article, call Frank and Judy Spees at (775) 832-7006.
My survey showed that many homes in the Lake Tahoe area are held in the names of individuals. There are even some lake front estates valued in the multi-millions of dollars owned in the name of just one individual. This is baffling to me. Why don't these property owners have living trusts? Perhaps the property was refinanced and the loan company took the property out of a trust to obtain the loan and after getting the new loan the owner failed to deed it back to the trust. It is hare to imagine that after all of the articles, books, and seminars over the last 30 years they still don't know that living trusts can avoid probate?
Probate is a real problem. If an individual dies holding property in his or her name it must go through a court proceeding called Probate to get to the heirs. In California, attorney and executor fees for Probate are statutory. They are figured on the gross estate; don't subtract mortgages or debts. On an estate of just $500,000, the combined fees would be $20,600. On an estate of $1 million, the combined fees would be $40,600! In Nevada, the attorney bills at an hourly rate which ends up being comparable to California fees and the executor has a statutory rate much the same. Since real property values have gone up so much, even an average house around the Lake can cause a huge probate bill.
Probate also takes a long time. The notice requirements and court hearings generally mean that a probate will last at least six months and frequently over a year. Often we are asked, "How will I know if I need a Probate?" There will not be a policeman knocking at your door to tell you to probate. Instead, it is very practical: You won't be able to sell an asset which is in the name of a deceased person. It may be years later when you try to sell a piece of property and the escrow and title people tell you to go to probate court.
It is a misconception that a will avoids a probate. The will is the document designed for and used in a probate. The original is lodged with the court and the terms of the will govern how the assets will be distributed. We like to say, "Where there's a will, there's a probate!"
Often people mistakenly think holding property in joint ownership with another person where it automatically passes to the survivor is the way to go. There are many pitfalls with joint ownership. The first is that it is a short-term estate plan. Once the first party dies the survivor has the same problem of how to transfer the property to the heirs without probate. The second problem is when you put another person on your title, their creditors become your creditors. A third problem is capital gains taxes. When property is inherited, there is a "step-up" in tax basis. If you buy an asset for $10,000 and you inherit at $110,000, you can sell it and pay no taxes. If you are own or are given the same asset with the same numbers, you have to pay $15,000 in capital gains taxes. With joint ownership you only inherit 1/2, so you would pay $7,500 in taxes. The answer is you want to let your loved ones inherit assets, instead of giving them a tax bill with joint tenancy. The problem is probate. The solution is the living trust.
Even spouses are better off owning the house in a living trust. The surviving spouse only inherits 1/2 in joint tenancy (and only gets a 1/2 forgiveness of those taxes). In the living trust, if the house is community property, there is a full forgiveness of taxes and probate is avoided too. That's how you have your cake and eat it too!
You need four documents:
1. A living trust avoids probate (your assets held in court after you die), guardianship (your assets held in court while you are incapacitated) and some taxes (some capital gains and some estate taxes in some cases). If you haven't got a living trust yet, where have you been the last thirty years? Time to get one!
2. A pour-over will takes assets you forgot to put into your living trust and puts them into the living trust after your probate.
3. A durable power of attorney for health care gives someone power to make health care decisions for you if you can't, and says what some of those decisions should be.
4. A durable power of attorney for assets authorizes someone to make asset decisions if you can't for assets you forgot to put into your living trust or for assets which can't be held in a living trust like retirement plans and air miles.
If you have all those documents, we need to change them because of HIPAA. This is a new privacy act called "The Health Insurance Portability and Accountability Act" that prevents the release of medical information to anyone, even your spouse, without a waiver. First, we need to amend your living trust so your "successor trustee" can get medical information to show that you are incapacitated. Second, we need to prepare a new health care document so your "health care agent" can get medical information to make the right decision if you are incapacitated. Third, we need to prepare a new durable power of attorney for assets so your "attorney in fact" can get medical information to show that you are incapacitated. In all of these documents we will have a succession so that there will always be someone ready to serve.
While we're making these changes, you might as well make other elective changes because there will be no extra charge. Take a look at who you have in charge and consider making changes. If you have moved since you signed your documents, let's put in a clause changing your residence, the "situs," or home of the trust, and the applicable law. This will keep other states from taxing the trust after you die. Take a look at who gets your assets in your old documents and make sure you want it to be that way.
In conclusion, its a very good idea to go over your estate planning documents with a professional every few years. By all means, title your real estate in your living trust!
If you have any questions about the information in this article, call Frank and Judy Spees at (775) 832-7006.
