Wait…what do you mean when you say not everyone needs a trust?
If you’ve been doing research on estate planning, you’ve likely read article after article discussing the importance of a trust, how trusts work, and the pros and cons of different types of trusts. It may sound like absolutely everyone needs a trust. But, there are other options and, in some (limited) circumstances, a trust may not be warranted.
As always, please consult your lawyer before you decide what option(s) are best for you. This post is designed to be a general education tool, does not constitute legal advice, and does not address all situations or all pros and cons.
(1) Small Estate Process
California offers a simplified process for small estates. It is important to note that this process cannot be used for real property, so if you own a house or condo you are out of luck. In addition, if any of your beneficiaries are minors and they will receive more than $5,000, a court proceeding is required, unless you set up a trust.
However, if you do not own any real property, none of your beneficiaries (if you have a will) or heirs at law (if no will) are minors, and you have a small estate, your beneficiaries/heirs may be able to claim their share of your property without having to go to court.
As of the writing of this post, the estate assets have to be $184,500 or less (assuming the decedent died on or after April 1, 2022). When totaling the value, you can exclude cars, property in a trust, assets with valid beneficiary designations, as well as some other assets. However, you can not deduct debt or mortgages so do not deduct anything for loans or credit card bills or any other type of debt. Also remember to include company benefits like life insurance or retirement accounts if they will not pass by beneficiary designation.
In order to take advantage of the simplified process for small estates, your beneficiaries have to calculate the size of the estate, wait 40 days after your death, properly complete a small estate affidavit and get it notarized, and then submit that document to the entity holding the asset.
Note that this process does not help if there is a dispute as to who your beneficiaries/heirs at law are and/or what they are entitled to. Additionally, if your estate is close to exceeding the threshold, keep in mind that it may exceed the threshold at the time of your death, in which case your beneficiaries/heirs at law will have no choice but will have to go through probate.
(2) Beneficiary Designations
Another way to avoid probate without a trust is to use beneficiary designations for accounts like life insurance, annuities, retirement accounts, and sometimes bank accounts. If you have a beneficiary designation set up, and the beneficiary is an adult (18+) and did not predecease you, then the account custodian (typically a bank or financial institution) will release the assets directly to the beneficiaries after it receives required documentation such as the death certificate and other paperwork.
This can be a fairly simple and straightforward process.
However, there are also disadvantages to relying on beneficiary designations. For one thing, any assets passed by beneficiary designation are subject to any applicable taxes and are counted against the estate and gift tax exemption. If you rely on beneficiary designations to pass significant amounts of money, your estate may be hit with a hefty estate tax bill which may disproportionately effect your heirs-at-law or beneficiaries (depending on whether you have a will). Trusts have more flexibility in ensuring tax minimization.
Additionally, if all of your liquid assets pass by beneficiary designation, then any assets that have to pass through probate or the small estate process may be harmed through the lack of liquidity. For example, if you have a car loan and your executor needs to make payments on the car while trying to get it sold, but cannot because there aren’t enough liquid assets in the estate, the car could be repossessed.
Another challenge is if you have beneficiaries pre-decease you and/or if a minor becomes a beneficiary. In either case, you can end up with the assets either having to go through a court process anyway or (depending on the account terms) it’s possible the assets may pass differently than you intended.
Of course, these also do not receive various benefits that come with a trust such as creditor protection, government benefit protections, etc.
(3) Transfer on Death
Another way to pass assets outside of probate is to use transfer on death accounts or deeds. Transfer on death accounts are similar to beneficiary designations.
Transfer on death deeds are available for specific types of real estate (such as a single family home). They are also revocable up until death so you can change your mind as to who you want to inherit the property.
In order to set up your property to transfer on death, you need to properly complete a transfer on death deed for the property and then have it witnessed and notarized. Then you need to record it at the appropriate county recorder’s office within 60 days of the notarization.
Seems simple, right? The process is pretty simple, inexpensive, and avoids probate. However, there are some drawbacks to using a transfer on death deed.
First, because creditors of the estate can make a claim against the property, title companies frequently will not issue clear title for three years after the transfer. This means your beneficiaries may not be able to sell the house and will have to maintain it for three years. If your estate has debts that your beneficiaries planned to pay off using the sale of the property, they may be in a tough position trying to scratch together liquid assets while saddled with the property.
Second, if the named beneficiary/beneficiaries predecease you, the transfer on death deed is ineffective. Similarly, if you hold the property as a joint tenant or with a right of survivorship, then your executed transfer on death deed is only effective if you survive the co-owner.
Third, if you become incapacitated, the transfer on death deed can prevent your guardian/conservator from being able to borrow against the house to pay for long-term care or other costs.
Fourth, there is no protection against creditors for either the estate or your beneficiaries. This also means that if your beneficiaries are successfully able to sell the property before that 3 year mark, there may still be an action to demand restitution from your beneficiaries which could include statutory interest at 10% annually from the date of the transfer to the date of restitution. As a result, your beneficiaries could end up owing more money than they actually received.
Fifth, if any of your beneficiaries are minors then there still must be a court proceeding as a minor cannot manage or transfer property until they are 18.
Ultimately, in some circumstances it may make sense to rely on the small estate process and/or beneficiary designations to serve as your primary method of avoiding probate. You can then use a will to ensure that assets that do not pass by beneficiary designation pass the way you intend.
Not everyone needs a trust because there are other options and, in some (limited) circumstances, a trust may not be warranted.