Real Estate as an Estate Planning Vehicle – Part 2: The Basics that Every California Homeowner Should Have

California real estate appreciates faster than real estate in most other states, and for that reason, it’s more likely to form the largest part of a homeowner’s total estate upon death. However, real estate is vulnerable in ways that other forms of generational wealth are not, and therefore requires more planning and protection. This four-part series will explore those vulnerabilities and provide tips on preserving the value of this precious asset for generations to come.

If you haven’t seen Part 1 of this series, read the full article here. Or, here’s a recap….

There are four major risks to preserving the value of California real estate for your lifetime and for the benefit of your heirs. They are:

1. Liability, both from “inside” (claims related to the property itself) and “outside” (claims unrelated to the property);

2. Probate, which is the court process through which assets are passed from a deceased person to a living person;

3. Taxes, both those due upon death and those incurred by our heirs after they inherit the property; and

4. Divorce, which can halve the benefit of your property if it is inherited by your children after they marry.

In this installment, we’ll discuss the basic protection strategies that every California homeowner should have in place to protect their real property assets for the next generation.

Liability Insurance

The first, most rudimentary piece of real-estate protection is liability insurance, also called personal liability insurance or umbrella insurance. This is insurance designed to cover the totality of your assets such that any claim that comes from any direction – i.e., from inside or outside your real estate holdings – will be covered.

Before I was an estate planning attorney, I spent a decade as a corporate litigator. I focused on complex lawsuits, representing big companies like Facebook and Amazon, and my major takeaway from that experience is that money wins in the American court system. Ninety-nine times out of 100, the party with more money will prevail, if for no other reason than that they can exhaust the other party’s financial resources.

Liability insurance levels the playing field. No matter where the claim comes from or the size of the other party’s pockets, the insurance carrier stands between you and their claim. Insurance companies have fleets of attorneys whose everyday occupation is to litigate or settle personal liability claims, on the insurance company’s dime. That’s the key here: the insurance company not only pays for your defense, but also pays any settlement or judgment that arises from the claim. Therefore, the primary determining factor of any lawsuit’s outcome is no longer the depth of your pockets, but rather… well, what does it matter? You’re not footing the bill.

Liability insurance preserves the value of your assets – particularly the high value ones like real estate – during your lifetime, enabling you to pass them down in whole to your heirs. Which leads me to the next layer of basic protection – a living trust.

Living Trust

If you’ve invested money and effort into your real estate, you don’t want to lose part of its value in probate. As a refresher from Part 1 of this series, probate is the court process by which a deceased person’s property is transferred to a living person, and it can cost up to five percent (5%) of the fair market value of all your assets.

The only way to avoid probate in California (and most states) is to create a trust. In the simplest terms, a trust is a fictional entity that holds assets and doesn’t die, and therefore doesn’t have to go through probate. It’s an agreement between a grantor, who gives assets to the trust; a trustee, who manages those assets; and a beneficiary, who receives the benefit of those assets.

In the case of a living trust (also called a revocable trust), all three roles are filled by the same person – you. During your lifetime, you have full control over which assets go into the trust, which assets come out of the trust, how the assets are managed, and how much income you draw from those assets. Unlike a corporation, your living trust doesn’t need its own taxpayer ID, nor does your trust need to file a tax return. While the grantor, the trustee and the beneficiary are the same person, a trust act like a pass-through entity, meaning that it looks to the IRS and all the world like an extension of you.

And most importantly for our discussion, a living trust will allow your home to pass to your children or other heirs free of probate, saving them time, money, and privacy. A home passes to heirs through a trust by making your heirs the new beneficiaries of the trust. Instead of two years in public court, this procedure is as simple as signing a few documents in the privacy of your attorney’s office.

These first two tiers of protection – liability insurance and a living trust – are the basics that every California homeowner should have in place.

Next, in Part III, we’ll discuss three additional tiers of protection that would allow owners of real estate more extensive than a primary residence to further protect themselves from liability, end-of-life taxes, and divorce. Stay tuned!

© 2024, Jane Legal PC

This article is a service of Jane Legal PC. We don’t just draft documents; we ensure you make informed and empowered decisions about life and death, for yourself and the people you love. That’s why we offer a free Wealth Planning Session™, during which you will get more financially organized than you’ve ever been and make all the best choices for your chosen family. Begin the process by scheduling a free 15 minute discovery call today.

This material was created for educational and informational purposes only and is not intended as ERISA, tax, legal, or investment advice. If you are seeking legal advice specific to your needs, such services should be obtained separately from this educational material.

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