Dear Len & Rosie,
Do I need a living trust?
I live in a mobile home. I don’t keep much in the bank, and my life savings, about $400,000, are invested in a 401(k).
You probably do not need a trust. The rule is simple — if your probate estate is worth under $150,000, probate is not required so a trust is not necessary for you to avoid probate.
And get this: Your mobile home doesn’t count against the $150,000 limit as long as it is registered with the California Department of Housing.
The same goes for your automobiles, provided they are registered with the DMV.
When you pass away, your mobile home can be easily transferred to your children or other heirs using a small estate affidavit under Probate Code section 13101. The DMV has a form, called the REG-5, that does the same thing for any vehicles you own on your death.
Your 401(k) will also avoid probate, provided that you have designated beneficiaries to collect the account upon your death.
It is vitally important for you to verify that you have done this. If you die and your 401(k) hasn’t got a beneficiary, then not only will it be subject to probate, costing your estate $9,000 in probate lawyer fees, your 401(k) will also be subject to income tax.
If, however, you have named your children or other loved ones as your 401(k) beneficiaries, then not only will your 401(k) avoid probate, your beneficiaries can roll over the 401(k) into Inherited IRAs.
This will allow each beneficiary to control how and when they’ll pay income tax on his or her share of your 401(k) by stretching out distributions over each beneficiary’s lifetime.
Each beneficiary will be in control of his or her share. One may decide to cash it in all at once (and pay the income tax all at once), while another beneficiary may stretch out distributions for his or her entire life.
There are only two reasons you may need a trust.
If you are on Medi-Cal benefits, then your mobile home would avoid a Medi-Cal reimbursement claim if it passes outside of your estate upon your death by being in a trust or is titled in joint tenancy with another person.
Or, you may want a trust if you have a minor, disabled or spendthrift beneficiary who cannot or should not receive an inheritance directly from you.
Even though you do not likely need a trust, you should still have an estate plan.
You need a will to dispose of your mobile home and other assets, and you also need a Durable General Power of Attorney and an Advance Health Care Directive so that people you trust can make important legal and medical decisions for you if you ever become incapacitated.
Len & Rosie