October 5, 2011

Estate Planning Fees

A common question from a homeowner who is interested in writing a revocable trust, is what are the costs and obligations, other than attorney fees, involved with the process? The following are
some topics raised by that question.

Property taxes

Whenever there is a “change in ownership”, the property taxes for that particular parcel of land will be re-assessed to its current the fair market value. Rev & T C §60. For example, if Bobby purchased from Sam a home for $500,000 in San Jose in 2007, Bobby’s property taxes would be based off of that $500,000 figure. Now assume that Bobby had purchased the property for $40,000 from Sam in 1979. In 2011, Bobby decides he wants to write a trust to avoid probate. However, Bobby is hesitant to write a trust and fund it with his home. He is worried that the Santa Clara County Assessor will try to re-assess his property taxes to its 2011 fair market value and in turn raise his property taxes. Fortunately for Bobby, California law is very specific in saying that a home transfer to a revocable trust is not considered a “change in ownership.” Rev & T C § 62(d)(2). Thus, the fear of re-assessment for property taxes when funding a revocable trust with a home is unwarranted.

Documentary transfer tax

In the case of a real property transaction, the transfer of a home from seller to buyer for example, there is the inclusion of a fee known as the documentary transfer tax. Rev & T C § 11911. The deed, the document which denotes the identity of the seller and buyer, must show the amount of the documentary transfer tax due. Rev & T C §11932. For reference, the tax rate is $0.55 per $500 of value (0.11 percent) sold. Rev & T C §11911.

Since a trust needs to be properly funded, whereby a trust transfer deed will need to be drafted, the documentary transfer tax becomes an issue, albeit only superficially. The reason for the superficiality is that California law states that a transfer of a home to a revocable trust is exempt from the fee imposed by the documentary transfer tax because there is no consideration tendered. Rev & T C §11930. Therefore, the documentary transfer tax is not an issue when a homeowner funds his or her trust when their home.

Income tax returns

Most revocable trusts are known as “Grantor Trusts” in IRS language. IRC §§671, 676. This means during the time that the trust is revocable, the settlor, the person who wrote the revocable
trust, is not required to file an additional tax return for the revocable trust. Hence, the creation of a revocable trust will not result in the settlor having to file more paperwork with the IRS and
California Franchise Tax Board.

Gift taxes

The inapplicability of gift tax in regards to creating a revocable trust bears mentioning to erase any confusion. There is no gift tax if you transfer property from yourself to a revocable trust that you created. A revocable trust is not a separate legal entity. Goldberg v. Frye (1990) 217 CA3d 1258. Hence, if you transfer property to your revocable trust it would be as if you handed an item from
your left-hand to your right-hand. Thus, there is no gift tax in the revocable trust creation equation because there is no third-party involved.

Recording Fees

Once a person has executed a trust transfer deed, it needs to be recorded in order to give proper notice to third-parties that the buyer is now the owner of the property. However, whereas there are exemptions with the previously mentioned fees and taxes, there is no such exemption for recording a deed. Each county has their own schedule of fees to record a document. For example, to record a deed in Santa Clara County, it is $15 for the first page and $3 for each additional page. The deed may be presented personally to the clerk-recorder or you can mail it in.

Notary Fees

It should be mentioned that a notarized signature is not required to execute a revocable trust. In that, there is no California law that says that a signature has to be notarized when executing a revocable trust. However, out of custom, a signature is notarized when executing a revocable trust.

A California notary may charge up $10 per signature when executing a revocable trust. Govt C § 8211. Often times, the attorney drafting the trust doubles as a notary and the fee is waived.