If You Own Real Estate In California You Need An Estate Plan

by loren on May 14, 2013

Anyone who owns or is planning to buy real estate in California should title their property in a revocable trust.  However more than 60% of Californians do no estate planning and when they die, their estate ends up in probate.  If you fail to plan ahead, in probate a judge will appoint someone to handle your assets.  Your assets will be distributed to your heirs according to a set of rules known as intestate succession.  If you die without a will, your relatives no matter how remote, and in some cases the relatives of your spouse will inherit your assets.  These remote relatives probably would not be your choice for receiving your assets.  An estate plan gives you much greater control over who will inherit your assets after your death. 

            There are a number of other disadvantages of not planning and having to go through probate:

1)      TIME CONSUMING:  Typically, a probate proceeding will take a year to complete. If there are disputes between persons claiming the estate or other complications, the probate process may take years to complete.

2)      EXPENSIVE: Court filing costs, the executor or administrator’s fee and the probate attorney’s fee are set in the Probate Code as a certain percentage of the value of the estate based on a sliding scale.  On a million dollar home the probate fees to the probate attorney would be $23,000 and to the executor or administrator $23,000.

3)      LACK OF PRIVACY: Anyone can find out the decedent’s assets, who the heirs are, what gifts were left to whom, and what debts, if any, the decedent had.  All documents filed in the probate court in California can be accessed via the internet.

            Joint Tenancy: A couple might decide it is easier to forgo putting their home in a revocable trust and instead title the home in joint tenancy with right of survivorship.  If an asset is owned by two or more people as joint tenants, it will usually not be probated.   However, joint tenancy is not recommended for assets that can increase in value, such as a house, because the surviving joint tenant will not receive a “stepped-up cost basis” to fair market value at the date of death of the other joint tenant.  (Cost basis is used to determine capital gains. The cost basis is the price the home owners paid for their home, plus any capital improvements that have been made. The cost basis is subtracted from the selling price to determine the capital gains.)  Further, for large estates, a revocable trust is a better tool for doing tax planning which would not be practical with assets held in joint tenancy.  The tax planning advantages used in a revocable trust, such as the creation of an exemption trust, are not possible for joint tenancy property.

            Community property with right of survivorship. On the other hand, owing a home as “community property” will give the surviving spouse a 100% step-up in basis.  If you are married in California (or registered domestic partners), community property with right of survivorship is another way to own real estate with your spouse.  If you hold title to property in this way, when one spouse dies, the property passes to the other spouse. However, the house will have to be probated after the death of the surviving  spouse unless the house is put in a revocable trust.

          Ultimately, if you own or plan to buy real estate it is prudent to set up an estate plan which would include a revocable trust and to then title your assets in the name of your trust so as to avoid probate.

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