Why a Living Trust? :: Don’t Confuse Estate Tax Levels With What Triggers Probate

As will be discussed below, there are certain threshold levels that trigger full probate -- but what many people have trouble differentiating is the fact that probate and what triggers probate has nothing at all to do with taxes or how much you can pass tax free. Again, probate (what you are trying to avoid) and what triggers probate has zero to do with Federal Estate Tax Exemption amounts (how much you can pass tax free). It is fundamental to understand that these are two completely separate issues that have no relation to each other.

For example when the estate tax exemption was $600,000 we always knew someone was making the mistake of confusing the two when we heard the statement that “you only needed a trust if you are worth over $600,000”. Such a statement was incorrect then just as it is incorrect now. As the estate tax exemption rises, the magnitude of the mistake only grows with the erroneous substitution of the higher exemption amount. So when the exemption rose to $1,000,000 people mistakenly began believing that “you only need a trust if you were worth over a million dollars” (wrong). Similar echoes of this costly mistake repeated when the exemption rose to $1,500,000 and unfortunately the magnitude of the mistake will only continue to expand as the exemption increases.

Stated again for emphasis, it is a very important point to understand that probate, what triggers probate, and probate fees bear no relation to Federal Estate Tax Exemption amounts.

The Value Levels That Do Trigger Probate

The real crux of the matter and the appropriate point to understand is what levels of asset value trigger the separate issue of probate. In California for example, any estate worth over $100,000 (one-hundred thousand) or over $20,000 (twenty-thousand) in real estate property triggers formal and full probate. Virtually all states follow a similar rule (many with even lower threshold values that trigger probate). A good rule of thumb to follow is that if you own a house or any real estate property, count on the fact that your estate will be subject to probate unless you take steps to prevent it.

It is important to note that even those under the probate threshold often find other subtle and valid reasons for establishing a trust (i.e. protected incapacity & asset management, etc. – discussed later).