Judd Matsunaga, Esq.
In the wake of the Covid pandemic, many families are getting serious about putting their affairs in order. Perhaps for the first time, many parents have thought about how to protect their families from probate court and the importance of creating their estate planning documents, i.e., wills, trusts and powers of attorney.
If you simply leave all your assets to loved ones in your will, this could have unintended consequences. Before a person’s property can be distributed in accordance with the will, the document must go through a court process called probate. The problem with probate is that no assets can be distributed until it is completed, which can take months or even years. The other major problem is that probate is expensive.
Many families are starting to understand that living trusts are not just for the rich. Avoiding probate benefits the not-so-rich, too. The only problem is that some families are saying, “We need a living trust to avoid probate,” in the same breath they’re also saying, “Let’s save a bunch of money and get a “Do It Yourself” (DIY) Trust online.” The logic seems sound; after all, why pay thousands of dollars or more to an estate planning attorney when you can do it yourself?
But wait — have you ever heard the old idiom, “Penny wise and pound foolish?” That’s what often happens when you try to save a few hundred dollars by creating an online trust, but your family may have to spend tens of thousands to go through the administration in probate court. Or even worse, litigate because there is something wrong with the document.
The first thing to know about estate planning is that there isn’t actually a single document known as an “estate plan.” Rather, an estate plan is made up of a collection of documents that create the legal solution needed in case of incapacity and eventually upon your death. Online sites and computer software programs are not designed to allow for differences in family dynamics, nor do they address your unique issues and concerns.
One of the biggest problems with DIY software packages and forms is the lack of professional advice. Although a software document may be able to walk you step-by-step through a form, it can never provide the advice that comes from an experienced estate planning attorney. In fact, the websites that sell these forms are required to clearly state that “No Legal Advice” is being given.
There is truly no substitute for advice from a licensed professional. It is very easy to overlook important legal and technical planning points that can cause your family to pay high fees in probate court, unnecessary taxes or lose public benefits like Disability, Medicaid or Medi-Cal.
It has been estimated that 40 percent of the trusts generated fail to avoid probate. The No. 1 reason why is that they are not properly funded. The biggest problem with DIY online trusts is they don’t tell you how to properly fund your trust. So, even if you create a DIY online trust, i.e., sign and notarize a legal document that is titled “Living Trust,” it may be ineffective, and your loved ones will still have to endure the probate process to finish what you started.
“Say what?” you ask. Simply executing a legal document called a Living Trust doesn’t mean you keep your family out of probate court upon your death. You have to “fund” your trust for it to be effective, i.e., transfer title of your money and property into the name of the trust. That means retitling your assets into the trust, so the trust owns the assets. As “Trustee” of your own trust, you still control your assets. But upon your death, you nominate a “Successor Trustee” who administers the trust according to your instructions.
Another major problem with DIY trusts is that they do not account for changing life circumstances. For example, what happens if one of your children dies before you? It’s unfortunate, but it happens, e.g., car accident, cancer, stroke, etc. Will that child’s share go entirely to the surviving child? Or to his or her children (i.e., your grandchildren)? Surely, you don’t want your assets to be distributed to the wrong people at the wrong time.
Finally, some people try to avoid probate and avoid the need for proper estate planning by putting the child’s name on their house while they are still alive. They’ll say, “Since my child already owns my home, there is no probate required upon my death!” Which brings me to a second idiom, “Out of the frying pan and into the fire.” In other words, trying to avoid a bad situation (probate) by escaping into a worse situation.
When planning your estate, don’t be penny wise and pound foolish.
Sure, you avoid probate, but you lose the “step-up” in basis, which could cost your child hundreds of thousands of dollars in capital gain taxes. “Say what?” The only time the IRS will forgive gain is if you transfer on death. Let’s say you paid $100,000 for your home and you put your child’s name on the deed. Upon your death, your child sells your home for $1 million. They’ll have to pay tax on a $900,000 capital gain, approximately $180,000 (20 percent).
Another huge problem is the possibility that you may want to tap the equity in your home to help pay for home care. However, you can’t — you don’t own it. Once you put your child’s name on title to your home, you lose control of your home. Or, what if you want to sell your home and move into a retirement home? You can’t.
Even worse, what if you put your home in your child’s name and your child gets sued or divorced? Your home could be subject to a judgment creditor or messy divorce proceeding. Even worse — what if you put your home in your child’s name and your child dies before you? Guess what, your son-in-law or daughter-in-law might own your home.
The bottom line is that a DIY living trust may save you some time and money in the short-term but could prove to be a financial disaster in the long term. If you want full peace of mind, you need an estate plan drawn up by a professional that is the right fit for your specific situation. It will pay off in the long run.
Judd Matsunaga is the founding attorney of Elder Law Services of California, a law firm that specializes in Medi-Cal Planning, Estate Planning and Probate. He can be contacted at (310) 348-2995 or judd@elderlawcalifornia.com. The opinions expressed in this article are the author’s own and do not necessarily reflect the view of the Pacific Citizen or constitute legal or tax advice and should not be treated as such.
