By JUDD MATSUNAGA, Esq.
California’s COVID-19 death toll is on the cusp of 90,000, a tally that comes as the U.S. is nearing its own milestone of 1 million deaths. No state has suffered more total pandemic-related deaths than California. (Source: L.A. Times, May 9, 2022) In the wake of the COVID pandemic, many families are getting serious about putting their affairs in order.
Fortunately, the Japanese American community has been around long enough to understand that Living Trusts are not just for the rich. Living Trusts will help ordinary families (who own their own home) avoid probate. The problem with probate is that it can take 12 months to 2+ years (depending on the circumstances) in California. No assets can be distributed until it is completed.
The other major problem is probate is that probate is expensive. In California, probate fees are set by law, i.e., California probate code § 10810. The code caps the maximum fees that attorneys and executors can charge for a probate. There are filing fees and a fee percentage (4%,3%,2%,1%,0.5% based on the gross value of the probate estate); and can have other extraordinary fees like appraisals.
As an example, if your estate consists of a $750,000 home and $250,000 in savings, statutory probate fees on a $1,000,000 estate would be $46,000. Even if you owed $300,000 on your home, mortgages and debts are not involved when calculating lawyer’s fees. This means, for example, that a house appraised at $750,000, yet has an outstanding mortgage balance of $300,000, still counts as a $750,000 asset when probate fees are determined.
That being said, why do I still see Japanese names on the probate court calendars? The biggest problem that I see is that some families are saying, “We need a Living Trust to avoid probate,” but 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 some families try to save a few hundred dollars by creating an online will or a trust. However, 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 do-it-yourself 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. Other planning issues are children with special needs, creditor issues or a child in a bad marriage.
It has been estimated that huge 40% of the trusts generated fail to avoid probate. The number one 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 re-titling 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.
Furthermore, 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.
Sure, you avoid probate by transferring title into your child’s name. 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 $1,000,000. They’ll have to pay tax on a $900,000 capital gain, approximately $180,000 (20%), i.e., the “worse situation.”
Another huge problem is that many seniors may want to tap the equity in their home to help pay for home care. However, if you transferred title to your child, you can’t. Once you put your child’s name on title to your home, you lose control of your home. What if you want to sell your home and move into a retirement home? You can’t – it’s not yours anymore.
Perhaps 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. That’s why any estate planning attorney would advise you to use a Living Trust.
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. While it may be tempting to save some money and do this yourself, 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.
Finally, watch out for document preparation services. A woman recently came into my office with her mother’s trust done by a document preparation service. I was shocked to find out that the non-attorney document preparation service company charged $2,500 for the estate planning package — SHOCKED!!! That’s about the same amount a licensed attorney would charge. Why wouldn’t people go to a qualified attorney and get legal advice?
In all U.S. states (except for Louisiana and Puerto Rico), only an attorney can advise and draft a legal document for another party. Now for the first time, a new California law known as SB1418 authorizes non-lawyers to prepare legal documents for people doing their own legal tasks. Effective Jan. 1, 2000, these non-lawyers, called Legal Document Assistants (LDAs), can draft living trusts and Power of Attorneys.
However, LDAs are not lawyers and cannot offer legal advice, discuss legal strategies, answer questions of a legal nature, select forms for the consumer, or appear in court on the consumer’s behalf. They are only authorized to assist consumers representing themselves in legal matters by preparing and processing the necessary legal documents.
While many LDAs have paralegal education and experience, in California they are not the same as paralegals. Unlike a paralegal, legal document assistants do not work under the supervision of an attorney. LDAs are authorized by law to provide legal document preparation services directly to the consumer. Most importantly, neither paralegals nor LDAs are permitted to engage in the practice of law or give legal advice.
In conclusion, anyone who owns a home (or condo), or has assets exceeding $166,250 needs a living trust. A Living Trust is a legal entity that owns your assets yet allows you to remain in complete control of them. Just make sure to have your Living Trust and related estate planning documents done by an experienced, licensed attorney (not a DIY trust online nor an LDA).
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Judd Matsunaga, Esq., is the founding partner of the Law Offices of Matsunaga & Associates, specializing in estate/Medi-Cal planning, probate, personal injury and real estate law. With offices in Torrance, Hollywood, Sherman Oaks, Pasadena and Fountain Valley, he can be reached at (800) 411-0546. Opinions expressed in this column are not necessarily those of The Rafu Shimpo.