California Residents Who Own an LLC Need a Trust to Avoid California Probate
by Richard C. Keyt and his father Richard Keyt
This article is written only for people who are California residents and who own an interest in one or more California limited liability companies with a value when combined with other personal property is more than $150,000. If the preceding statement applies to you then you need to read this article and create a revocable living trust to own your LLCs so your family can literally save thousands and thousands of dollars on your death by avoiding a California probate.
We’ve all heard the saying that there are two things we can’t avoid, i.e., death and taxes. California residents who have valuable assets need to add an expensive and time-consuming California probate to this list. The good news (if you can call it good news) is that California residents can avoid probate and the ridiculous fees and costs of a California probate by having a trust own their LLCs and other assets.
What is a California Probate?
Probate is a court supervised legal proceeding in which a person or entity is appointed by the court to be the personal representative (aka executor) of the estate of a person who died. The purposes of a probate are to: (i) give the personal representative the legal power to take control of the deceased person’s assets, (ii) allow the personal representative to use probate assets to pay the deceased person’s debts, and (iii) give the personal representative the power and responsibility to transfer the decease person’s probate assets to the deceased person’s legal heirs.
If a California resident dies and he or she owned assets that remain in the name of the deceased, a California probate is required to transfer title / ownership of the assets to the heirs of the deceased unless the value of the deceased’s personal property is less than $150,000 and the value of the deceased’s real estate is under $50,000. If a probate is required and not completed, the deceased’s assets will remain titled in the name of the deceased and the heirs will not become the owners of the assets. Thus, the family of the deceased person is forced to go through a nightmarish California probate.
Why California Probates are a Nightmare for Families
Each state has its own probate laws. Probate can be easy, not so easy or extremely difficult. Arizona probate law is easy. We routinely do simple Arizona probates for $2,500 start to finish. Arizona probate law does not require that the personal representative be paid a statutory executor’s fee.
Unfortunately California probate law imposes statutory fees payable to the attorney and the personal representative. California Probate Code Section 100800 sets forth the statutory fees payable to the personal representative. California Probate Code Section 1008010 sets forth the statutory fees payable to the attorney who represents the personal representative on behalf of the estate. These two statutes zap a double whammy on the heirs.
The table below shows the statutory fees payable to the attorney and the personal representative based on the GROSS VALUE of the assets administered in the probate. Both of the above statutes state that:
“the value of the estate accounted for by the personal representative is the total amount of the appraisal of property in the inventory, plus gains over the appraisal value on sales, plus receipts, less losses from the appraisal value on sales, without reference to encumbrances or other obligations on estate property.”
This outrageous definition of gross value is the biggest reason California residents should always own their LLCs and other assets in a revocable living trust.
California Residents Who Own an LLC + Death = Costly California Probate
John Doe is a California resident. He is the sole member of a California LLC that owns a California home that it rents. The rental property has an appraised value of $300,000 and is subject to a $200,000 loan. For the sake of simplicity, John Doe does not own any other assets. Let’s consider two scenarios and compare the probate costs.
John dies. He has a Will that leaves everything to his two kids, his son Greedy and Greedy’s younger sister Susie. If John were alive he could cause the LLC to sell the home for $300,000, pay off the $200,000 debt and have $100,000 before taxes. If John died after his LLC converted the home to cash the value of John’s personal property after death would be under $150,000 and his heirs could use an affidavit procedure to get the cash and avoid a California probate.
Unfortunately for John’s kids, John’s LLC owned the $300,000 home when he died. You’d think that the value of John’s LLC for the purpose of determining whether or not his heirs could avoid a California probate would be $100,000, but that would be wrong. California Probate Code Section 13101(b) states that when determining the value of personal property for the purposes of qualification to use the California small estate affidavit procedure for personal property the “current gross fair market value of the decedent’s real and personal property in California, excluding the property described in Section 13050 of the California Probate Code” cannot exceed $150,000. Note the words in red “gross fair market value.”
Because the LLC’s value without taking its debt into consideration is $300,000, John’s children cannot use the small estate exemption for California personal property that only applies when personal property does not exceed $150,000. John’s Will names Greedy as his first choice for personal representative of his estate. Greedy hires attorney Jack Feesup to represent him as the personal representative of the estate. Greedy files a petition with a California Superior Court and opens a probate for his father’s estate.
Greedy causes the LLC to sell the land for $300,000, pay off the $200,000 debt and puts $100,000 in the estate’s bank account. Greedy then causes the estate to pay statutory attorneys fees of $9,000 to attorney Feesup and statutory personal representative fees to himself of $9,000. The estate paid miscellaneous probate fees of $2,000. The estate has $80,000 left to distribute to the two heirs. When all is said and done Greedy got $49,000, Susie got $$40,000 and the other $11,000 was used for probate expenses.
Why California Residents Should Have a Trust to Own Their LLC
Consider the same facts as above except when John formed his LLC he hired Keyt & Keyt, LLP, to form a revocable living trust for $1,000. John’s trust became the sole owner of the LLC. John was the initial trustee of the trust. The trust agreement named Greedy as the first successor trustee to take over control of the trust after John’s death. Susie was named as the second successor trustee. The trust agreement says that the trustee serves without compensation. The trust agreement provided that immediately after his death the successor trustee was obligated to sell the land and distribute the net proceeds equally to Greedy an Susie.
After John’s death Greedy became the sole trustee. He sold the property and distributed $50,000 to himself and $50,000 to Susie. Because John had the foresight to know he did not want his loved ones to bear the unnecessary cost of an expensive California probate John created a trust to own his LLC rather than owning it outright in his name.
Bottom Line Net Savings to the Family Because a Trust Owned the LLC: $19,000. This is a savings of $19,000 on an estate valued at $300,000. If the value of John’s estate had been substantially more than $300,000 the saving to the family by having a trust own the LLC would have been much greater. See the right column of the table below to see how much a trust can save your family.
How to Avoid Being an LLC Idiot
If you are a California resident who owns one or more LLCs and the total value of all your personal property that is counted when valuing an estate for the purposes of the California small estate from probate exemption (LLCs and assets owned outright) is not more than $150,000, you can save your loved ones thousands and thousands of dollars by creating a trust to own your LLCs. The table below shows how much money your family can save by having a trust own your LLCs.
It’s really a no brainer. If you are a California resident who owns or will own one or more LLCs that have substantial value, do your family a big favor and hire us to create a revocable living trust to own your LLCs. We are estate planning attorneys with years of experience creating trusts. Our fee is a reasonable $1,000, a small amount when you consider the savings displayed in the far right column of the table below.