If you are considering establishing an estate plan, I am sure you have come across a litany of attorneys discussing the benefits of doing so. 15 years ago, one of the biggest advantages to creating a family trust was tax planning. At that time, the estate tax exemption was merely $675,000. This means that if an individual died in 2000 with an estate valued at more than $675,000, the estate tax was imposed on the amount exceeding $675,000 with a maximum tax rate of 55%. Today, the estate tax exemption is astronomically higher. In 2015, the exemption is $5,430,000. Consequently, tax planning is not much of a concern for 99% of Americans, unless the exemption were to be reduced in the future.
So why am I telling you this? Another focus of estate planning, and one that has taken the forefront to tax planning in recent years, is avoiding probate. When someone dies without a trust, their estate must be probated. Why does it benefit you to avoid this process? Pursuant to California Probate Code Section 10810, there are statutory attorney's fees that are imposed on the decedent's estate. If a loved one were to die and you hired an attorney to assist you with the court process, the attorney is permitted to recover fees according to the following fee structure:
- 4% of the first $100,000 of the estate's value
- 3% of the next $100,000
- 2% of the next $800,000
- 1% of the next $9,000,000
- .5% of the next $15,000,000
Let's look at a hypothetical. Jane is a dentist with a successful practice. She owns her residence which is valued at $600,000. Jane also owns a rental property worth $250,000. In addition to her real property, Jane has other assets, savings, retirement accounts, personal property, and a coin collection, that are valued at $150,000. Jane also has two children, Clifford and Sarah. Unfortunately, Jane passes away without a trust, thus her estate must go through probate. Clifford and Sarah hire an attorney to assist them with the probate of their mother's estate. With a total estate value of $1,000,000, the attorney can charge the following fees under the Probate Code:
- 4% of the first $100,000 = $4,000
- 3% of the next $100,000 = $3,000
- 2% of the next $800,000 = $16,000
- TOTAL FEES CHARGED = $23,000
By simply charging what the attorney is permitted to charge, Clifford and Sarah lose out on $11,500 EACH!
Now consider this: From October 2014 to January 2015, the median home sale price in San Diego County was $450,000.* If all you owned was an average home in San Diego when you died, your heirs would lose out on $12,000!
Wait, I know what you're thinking. I am using the gross value of the properties in calculating the fees owed. What if the home is encumbered by a mortgage? The net value of the home should be used to calculate the statutory fee, right? NOPE. In California, the GROSS VALUE of the decedent's property is used to calculate the fees. Returning to our example with Jane, if her home had an outstanding mortgage balance of $400,000, the fee is calculated using the fair market value at the date of her death, $600,000, NOT the $200,000 of equity in the home after subtracting her mortgage.
When you hear San Diego estate planning attorneys mention the need to establish a trust if you own real property, this is why. The need is heightened in California because property values are higher than in other parts of the country.
By creating a trust and placing your assets in the trust, none of the above is a concern. Sure, there is a cost to administering a trust, however it pales in comparison to the exorbitant fees charged if an estate is subject to probate. If that wasn't enough to convince you, consider that the average probate case lasts for anywhere from 12 to 18 months. Your heirs will not see their inheritance until the estate is administered with court authority.
Now you know why probate avoidance is a paramount concern and one of the biggest advantages to establishing an estate plan tailored to your circumstances.
*Information taken from Trulia.com.