Table of Contents

  1. How do I determine if a probate is required?
  2. When must I file for Probate?
  3. Why does a revocable trust avoid probate?
  4. If I update my Living Trust, do I have to re-title all the assets in the Trust?
  5. How can on-line services claim to do Living Trusts for $500 or less?
  6. What is a Life Insurance Trust?


How do I determine if a probate is required?

In California, a probate is required if an individual dies with or without a will with $100,000 or more of SEPARATE property.  While not complex, the Probate rules must be followed.  If one has Real Property, a Probate is required and an order or approved Affidavit must be obtained before title to the property can be transferred.

In Nevada, a full probate is required if one dies with Real Property and an Estate valued over  $200,000.  An abbreviated procedure may be done if the estate is valued less than $200,000.

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When must I file for Probate?

In both California and Nevada, one should file within 30 days of the decedent's death. The named executor or next person in line may be removed as Executor or Administrator if they do not file within 30 days.

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Why does a revocable trust avoid Probate?

The answer is really simple.  The trust doesn't die.  Probate is required when one dies.  Since the trust doesn't die, there is no legal requirement for court action.  The named Trustee simply changes from one to another.

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If I update my Trust do I have to re-title the assets in the trust?

No.  The trust can even be revoked and restated. That way the Trust name stays the same and the home or other titled assets need not be changed.

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How can on line services claim to do trusts for $500 or less?

This is deflective advertising.  Doing a basic trust is pretty simple.  However one must understand what it is they are doing.  Going on-line presumes you know the law behind Trusts.  There are over 600 pages of California law and a similar amount of California Rules covering the treatment of Trusts, the obligations of the Trustee's the tax treatment of trusts, the MediCal treatment of trusts, and the like.  Doing a trust is serious business. You are dealing with hundreds of thousands of dollars in assets; More if you own real California property,  and distributing those assets to those you care about.  Your Estate Plan should be carefully reviewed with someone who understands the law, the psychology, and the pitfalls that a poorly adapted trust can create.  Doing this yourself usually causes problems and causes litigation in many Estate proceedings.  Unlike the Probate process, Trust litigation has no legal cost limit.  The cost of administering a poorly adapted trust usually greatly exceed the cost of probate. 

The Trust mills usually have you answer a number of questions then they send you the same trust everyone else gets.  They can't do it any other way. They depend on your ego to sell you a "Yugo."  Note the fine print.  Are you dealing with a law firm or a form provider?  A good Estate Plan, that may include a Trust, usually requires at least a couple of hours with a skilled attorney just to figure out the best approach for you. Jumping into a Trust can easily be hazardous. Just ask someone who was kicked off of SSI or Medicaid because they received trust money.  Just ask the Trustee who lost their home because they made a mistake and were sued.

A good estate plan will take at least 2-3 hours of direct interaction with the attorney in addition to the preparation and review time spent drafting the documents. That can not be done for $500.

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What is a life insurance trust?

Please remember that this answer is provided in the spirit of public education, not as legal advice. If you require legal advice for a particular situation, you should consult an attorney.

A life insurance trust is a trust that is set up for the purpose of owning a life insurance policy. If the insured is the owner of the policy, the proceeds of the policy will be subject to estate tax when he dies. But if he transfers ownership to a life insurance trust, the proceeds will be completely free of estate tax. (The proceeds will be exempt from income tax either way.)

Given the current estate tax rate of 46%, a life insurance trust can save hundreds of thousands of dollars in estate taxes. However, there are several drawbacks to such an arrangement:

1. You can't change the beneficiary of the policy.

The insured must give up the right to change the beneficiary of the policy (the trust itself will be the beneficiary). The trustee alone has that right, and the insured cannot serve as trustee of his own life insurance trust. Of course, the insured will designate the beneficiaries of the trust (for example, her children). But because this designation cannot be changed after the life insurance trust has been set up, the insured will lack the flexibility to deal with changed family circumstances with this particular policy.

2. You can't borrow from the policy.

The insured can no longer borrow against the policy. If the trust allows her to borrow against the policy, she will be deemed to be an owner of the policy for estate tax purposes.

3. You can't transfer an existing policy to the trust -- unless you live for at least 3 more years.

If the insured transfers an existing policy to a life insurance trust and dies within the next three years, he will be treated as the owner of the policy and it will be taxed in his estate. Even if he survives another three years, he will have made a taxable gift in the amount of the cash value of the policy. If the life insurance trust takes out a new policy on the insured's life, however, the insured will never be deemed to own the policy. Furthermore, no cash value will have built up yet, so no taxable gift will be made.

4. The life insurance trust must be irrevocable.

Once you set up and fund the trust, you cannot get the policy back. If you become uninsurable, you will be committed to this trust as your only life insurance.

5. Premium payments may use up your estate tax exemption.

If the policy has not yet endowed, you must find a way to pay the premiums without using up your estate and gift tax exemption. If you transfer securities to the trust so that the trustee will have income with which to pay the premiums, the full value of the securities will be a taxable gift. If you transfer cash to the trust each year to pay the premiums, each transfer will be a taxable gift. However, you may be able to exempt these premium payments from gift or estate taxes by setting the life insurance trust up as a Crummey Trust. Then each premium payment can be sheltered by your annual gift tax exclusion, which is $12,000 (indexed for inflation) per trust beneficiary.

6. You must find or hire a trustee.

The insured cannot serve as trustee of the life insurance trust. That means that he will have to find or hire a third party trustee. However, many banks and trust companies offer reduced fees for life insurance trusts because they involve essentially no investing decisions.

Despite these drawbacks, many people find that the tax saving potential of a life insurance trust is worth the cost and hassle. It allows you to remove from your estate a significant asset that you are unlikely to want access to during your life. And it ensures that the life insurance proceeds go 100% to the beneficiaries, not the federal government.


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Copyright 2001  [Law Offices of James A. Busse Jr.]. All rights reserved.
Revised: 02/18/07.