Are GRUTs subject to probate?

Grantor Retained Unitrusts, or GRUTs, are powerful estate planning tools, but understanding their relationship to the probate process is crucial for effective wealth transfer. While a properly funded GRUT can largely bypass probate, it’s not an absolute guarantee, and several factors determine whether assets held within a GRUT will ultimately be subject to court supervision after your passing. A key benefit of estate planning is to avoid the costly and time-consuming probate process; approximately 60% of Americans do not have a will, and their assets are distributed according to state law through probate courts.

What Happens to Assets in a GRUT After Death?

A GRUT functions by transferring assets to an irrevocable trust while retaining an income stream for the grantor – you. This retained interest is a crucial element. Because the trust is irrevocable, the assets themselves aren’t directly owned by you at the time of death, which is the primary reason GRUTs are designed to avoid probate. However, the remainder interest—what’s left of the trust after your death—passes to your beneficiaries. If the GRUT is structured correctly, this remainder interest bypasses probate and goes directly to those named in the trust document. This is the ideal outcome. The California probate code dictates that estates over $184,500 require formal probate proceedings, potentially incurring statutory fees for executors and attorneys, which can be a percentage of the total estate value. Avoiding this is a primary driver for utilizing trusts like GRUTs.

A Story of Unclear Titling and Probate

I remember working with a client, David, a successful real estate investor. He established a GRUT to hold several rental properties, intending to provide income for his retirement and eventually pass the properties to his children. He meticulously planned the trust terms, but unfortunately, he didn’t fully coordinate the titling of the properties *into* the trust. After David passed away, his children discovered that some of the properties were still titled in his individual name. Those properties, despite being intended for the GRUT’s beneficiaries, were subject to probate. This oversight added significant delays and legal fees to the estate settlement process. It highlighted that even the most well-designed trust is ineffective if the assets aren’t properly transferred into it.

How to Ensure Your GRUT Avoids Probate

To ensure your GRUT effectively avoids probate, several steps are essential. First, proper funding is critical. All assets intended to be held by the GRUT must be legally transferred into the trust’s ownership. This includes deeds for real estate, assignments of brokerage accounts, and changes to beneficiary designations on life insurance and retirement accounts. Secondly, maintain clear records. Keep copies of all transfer documents, trust agreements, and supporting paperwork. A well-organized estate plan makes the administration process much smoother for your beneficiaries. It’s also vital to understand the implications of community property in California. All assets acquired during marriage are typically owned 50/50, and the surviving spouse receives the full benefit of the community property, including a “double step-up” in basis, which can significantly reduce capital gains taxes.

A Success Story of Careful Planning

Another client, Sarah, was proactive about her estate planning. She established a GRUT to hold a significant stock portfolio. She worked closely with her attorney to ensure all the shares were properly transferred into the trust and that the trust document clearly defined her beneficiaries and their inheritance percentages. After Sarah passed away, the trustee seamlessly distributed the stock portfolio to her designated beneficiaries, avoiding probate altogether. The process was smooth, efficient, and provided her family with peace of mind during a difficult time. This outcome demonstrated the power of careful planning and proper implementation.

Furthermore, California law allows for both formal wills (signed and witnessed by two people simultaneously) and holographic wills (entirely handwritten by the testator). However, relying solely on a will can be risky, given the potential for challenges and the probate process. A GRUT, when properly structured and funded, provides a more robust and reliable mechanism for transferring wealth. Finally, it’s crucial to adhere to the California Prudent Investor Act when managing investments within the trust, ensuring that the trustee acts responsibly and in the best interests of the beneficiaries.

If you’re considering a GRUT or any other estate planning tool, it’s essential to consult with an experienced estate planning attorney. Steven F. Bliss ESQ. can help you navigate the complexities of California law and create a plan that meets your specific needs and goals. He can be reached at (951) 582-3800.