Avoiding Probate In California

William Sweeney

WHAT IS PROBATE?

The probate process remains a mystery to many California consumers seeking legal advice. Probate is a legal process through which the appropriate county court sees that the deceased's assets are distributed according to the deceased's Will or applicable law.

If no Will exists, assets will be distributed according to state law. Probate determines the wishes of the deceased, determines which debts are to be paid, and orders the distribution of probate estate property according to the decedents wishes or applicable law. For example, real property interests are very important and California has a very strong interest in ensuring it is passed according to the desire of the owner or applicable law.

Common misperceptions include the belief that (1) avoiding probate avoids estate taxes, (2) trusts eliminate all estate taxes and (3) probates are only required when someone dies without a Will (i.e., intestate). The probate process can be thought of as simply the last option for transferring title from the decedent to the intended beneficiaries, when no other options work.

WHY IS PROBATE SOMETHING ONE TYPICALLY WANTS TO AVOID?

You have likely heard that "probate" is something you want to avoid but didn’t know why. Three reasons why you may want to avoid probate in California are:

  • Unnecessary expenses. Because probate is a court administered process, an attorney typically needs to be involved. Additionally, an Executor must be appointed to direct the procedure on behalf of the deceased person’s heirs. Both the attorney and Executor are entitled to receive fees payable from the deceased person’s assets (the "estate"). While the fees are set by the state of California, such fees can be significant and often unnecessary. For example, for a simple estate with $400,000 of assets (without consideration of any debt on such property), the required fee to the attorney and Executor would be $11,000 each. Specifically, the fees are 4% of the first $100,000 in assets, 3% of the next $100,000, 2% of the next $800,000, and 1% of the next $15,000,000. While the Executor fees can be waived if the heirs are serving in that role, the attorney fees are likely unavoidable. Additionally, court fees and expenses are usually several thousand dollars and appraisal fees can equal as much as .1% of the value of the property.

  • Time delays. Because probate is a court administered procedure, numerous documents and forms need to be filed with the court and many actions require court supervision. As a result, the transfer of property to the intended heirs is often a lengthy process usually lasting between 6 months and 2 years. During that time, the property may not be able to be sold and if sold the heirs may have limited access to the sale proceeds.
  • Public information. Since all documents relating to the transfer of property must be filed with the court, such information is available for public review. Therefore, in most circumstances, not only are the values of the deceased person’s assets subject to public disclosure, but so are the deceased person’s intended beneficiaries and any conditions on their receipt of the assets.
  • Loss of control. A judge you have never met or who doesn’t know you or your family will be ultimately making decisions as to how your assets would be distributed. As we all know, someone might look great on paper and might seem like the obvious choice to be an heir of your estate, but it may not be the person you would choose to receive your assets.

WAYS TO AVOID PROBATE IN CALIFORNIA

The legal mechanisms available for transferring ownership of an asset outside of probate (i.e., avoiding probate) in California can be generally summarized as follows:

  • By Gifting. An individual can transfer property to others and thereby avoid owning such property at the time of death. A lifetime gift, also known as an inter vivos gift, can be used to prevent specific assets from passing through probate at death. The income tax and gift tax effects of any significant gift should be considered carefully. Caution: a gift once made may not be returnable.

  • Real Property By Right of Survivorship. The California Civil Code allows real property owners to designate who will succeed to their property on death through the manner in which title to the asset is taken. Specifically, two individuals can hold title to an asset in "joint tenancy," which by definition includes the term "right of survivorship." (See California Civil Code §683)

    On the death of one joint tenant, the asset is owned entirely by the surviving joint tenant. The transfer of title is accomplished generally through the recording of a death certificate and affidavit concerning the death with the county recorder’s office where the prspanoperty is located. The right of survivorship characteristic under the California Civil Code applies to both real property and personal property, but not to bank accounts, which are governed under the Probate Code’s Multi-Party Account Laws. (See below). With right of survivorship, the decedent’s Will does not control the distribution of the asset and no probate is required.

  • Spouses and Community Property With Right Of Survivorship. Spouses may also avoid probate by holding title to real property as "community property with right of survivorship." Unlike joint tenancy, which by definition always includes the right of survivorship, community property without the specific designation "by right of survivorship," does not pass by survivorship. In that case, at the death of one spouse, only his or her half of the community property goes to the surviving spouse unless he or she left a will that directs otherwise.

    If there is no will, community property that is given to a spouse can avoid probate if a spousal property petition is used. After the death of a spouse, a spousal prospanperty petition will transfer assets from the deceased spouse to the surviving spouse (or domestic partner). It is a simplified probate, and takes much less time than a full probate. Legal fees are usually much lower for a spousal property petition than a full probate.

  • Real Property Revocable Transfer On Death Deed. Effective January 1, 2016, California allows real property to be transferred upon a person’s death through a revocable transfer on death deed (sometimes referred to as a "TOD deed" or "Beneficiary Deed") and avoid probate. The new law expires Jan. 1, 2021, to allow time to study its effects. Transfer on death deeds that are executed between now and then would not be impacted; they would still be in effect and could be revoked at any time. But no new ones can be executed after that date unless the law is extended. The law requires the California Law Revision Commission to study and make recommendations regarding the new deed to the Legislature by January 1, 2020.

    The concept of transfer-on-death deeds is directly comparable to the use of pay-on-death or transfer-on-death accounts at banks or with brokerage houses as outlined below. The validity and operation of a revocable transfer on death deed are subject to statutory rules and requirements. Very importantly, these are rules and requirements that can be misunderstood, respansulting in mistakes and unintended consequences. One should seek experienced legal guidance in this area.

  • Payable On Death (POD) Accounts. In California, you can add a "payable-on-death" (POD) designation to bank accounts such as savings accounts, checking accounts and/or certificates of deposit. You still control all the money in the account – your POD beneficiary has no rights to the money, and you can spend it all if you want. A POD payee inherits whatever money is in the account at your deatspanh and doesn't have to go through probate to claim it--all that's required is showing up at the bank with a death certificate and identification. Payable-on-death accounts can be marvelous estate planning tools. For a cost of exactly nothing, you can add POD beneficiaries to your bank accounts and CDs.

    Also, this encompasses the standard life insurance beneficiary designations and retirement account beneficiary designations. On the death of the insured or the employee (i.e., the owner), the funds in the account pass to the individual that the owner designated on a beneficiary designation form filed with the financial institution (i.e., insurance company, employer or tax deferred account custodian).

  • Transfer-on-Death (TOD) Securities Registration. Almost every state has adopted a law (the Uniform Transfer-on-Death Securities Registration Act) that lets you name someone to inherit your stocks, bonds or brokerage accounts without probate. It works very much like a POD bank account. When you register your ownership, either with the stockbroker or the company itself, you make a request to take ownership in what's called "beneficiary form." When the papers that show your ownership are issued, they will also show the name of your beneficiary. After you have registered ownership this way, the beneficiary has no rights to the stock as long as you are alive. But after your death, the beneficiary can claim the securities without probate, simply by providing proof of death and some identification to the broker or transfer agent.

  • Multi-Party Account. Multi-Party Account Laws provide generally that, upon the death of one of the individuals listed on the account, the funds in the account are owned by the remaining individuals. The decedent’s share of the funds passes by the terms of the contract (i.e., signature card) and if unspecified by contract, then by operation of law (the Multi-Party Account Laws) to the surviving individuals. The transfer of title is accomplished by providing a death certificate to the financial institution holding the account. The decedent’s Will does not control the distribution of the funds, and no probate is required.

    But while joint accounts can be useful in certain circumstances, they can have dire consequences if not used properly:

    Once money is deposited in a joint account, it belongs to both account holders equally, regardless of who deposited the money. Account holders can withdraw, spend, or transfer money in the account without the consent of the other person on the account. When one account holder dies, the money in the account automatically goes to the other account holder without passing through probate.

    A joint account makes the account vulnerable to all the account owner's creditors. For example, suppose you add your daughter to your bank account. If she falls behind on credit card debt and gets sued, the credit card company can use the money in the joint account to pay off your daughter's debt. Or if she gets divorced, the money in the account could be considered her assets and be divided up in the divorce.

    Joint accounts may also affect Medicaid eligibility. When a person applies for Medicaid long-term care coverage, the state looks at the applicant's assets to see if the applicant qualifies for assistance. While a joint account may have two names on it, most states assume the applicant owns the entire amount in the account regardless of who contributed money to the account. If your name is on a joint account and you enter a nursing home, the state will assume the assets in the account belong to you unless you can prove that you did not contribute to it.

    In addition, if you are a joint owner of a bank account and you or the other owner transfer assets out of the account, this can be considered an improper transfer of assets for Medicaid purposes. This means that either one of you could be ineligible for Medicaid for a period of time, depending on the amount of money in the account. The same thing happens if a joint owner is removed from a bank account. For example, if your spouse enters a nursing home and you remove her name from the joint bank account, it will be considered an improper transfer of assets.

  • By Trust. Assets held in trust have universally escaped the probate process. In California, you can make a living trust to avoid probate for virtually any asset you own - real estate, bank accounts, vehicles, and so on. You can create a trust document, naming yourself as trustee and someone to take over as trustee after your death (called a successor trustee). Then - and this is crucial - you must transfer ownership of your property to yourself as the trustee of the trust. With real estate it requires a deed conveying the real property from the owner to the trustee(s) of the trust . Once all that's done, the property will be controlled by the terms of the trust. At your death, your successor trustee will be able to transfer it to the trust beneficiaries without probate court proceedings.

    The trustee is considered the legal owner of the property. Since the trustor or beneficiary is not the legal owner, the death of the trustor or beneficiary does not affect the ability of the trustee to hold or transfer legal title, and thus no probate is required.

  • By Transfer of Real Property with Retained Life Estate. The transfer of real property with the retention of a life estate can avoid probate. For example, the sole owner of a house transfers it to her child but retains the right to possess the house until her death. She has retained a life estate. The child’s interest in the house is known as a remainder. The chispanld becomes the owner of the house upon the parent’s death without the need for probate.

    Before using a transfer with a retained life estate to avoid probate administration of real property, the tax effects of such a transfer should be carefully examined. Such a transfer may result in a lower tax basis for the remainder owner of the property. Consideration should also be given to how house expenses will be shared. It is a good idea to consult with a lawyer, to prepare the deed, and also to explore the advantages and disadvantages of this probate avoidance option.

  • Simplified Procedures. The California Probate Code provides that probate estates of $150,000 or less do not need to be probated. If the estate consists of assets in excess of $150,000 a probate is necessary. The $150,000 amount is calculated by totaling all of the probate assets owned by the decedent. In some cases, the actual estate may be well in excess of $150,000, but the small estate law can still be used. The reason is that many assets are not defined as probate assets, such as life insurance (unless it was payable to the estate), IRAs, 401Ks, assets held by a living trust, and joint tenancy assets.

  • Personal Property Under $150,000 In Value By Affidavit. To receive property by this streamlined procedure, spanthe person entitled to the property must present an affidavit to the person, representative corporation or institution having custody or control of the property, or acting as a registrar or transfer agent of the property, requesting that the property be delivered or transferspanred to them. If there are several assets to be transferred, they may all be included in one affidavit, or a separate affidavit may be used for each. When using this affidavit procedure to collect or transfer personal property, the following rules apply:

    1. At least 40 days must have elapsed since the death of the decedent before the affidavit or declaration is presented to the holder of the property.
    2. No administration proceedings may be pending or have been conducted for the decedent’s estate.
  • Real Property Not Exceeding $50,000 In Value By Affidavit. If the estate contains real property not exceeding $50,000 in value then title to the property can be obtained by the successors of the decedent by filing an Affidavit re: Real Property of Small Value with the Superior Court of the county in which the property is located and then recording a certified copy with the county recorder. Some special requirements apply to this procedure:

    1. The affidavit may not be filed until six months after the decedent’s death. No probate proceedings may be pending or have been conducted in California for the estate.
    2. Funeral expenses, last illness expenses and all unsecured debts of the decedent must have been paid before the affidavit is filed.
  • Real And Personal Property Not Exceeding $150,000. If the decedent owned property in California not exceeding $150,000 in value, the heirs or beneficiaries may file a simplified procedure with the Superior Court asking for an order to determine their right to take the property without probate administration. The $150,000 amount is calculated by totaling all of the probate assets owned by the decedent. As mentioned above, in some cases, the actual estate may be well in excess of $150,000, but the small estate law can still be used. The reason is that many assets are not defined as probate assets, such as life insurance (unless it was payable to the estate), IRAs, 401Ks, assets held by a living trust, and joint tenancy assets.

    The petition is called a "Petition to Determine Succession to Real Property." It is primarily used for real property, but also includes a request to determine the successor of certain personal property as well. If there is only personal property in the estate, the affidavit discussed above under "Personal Property Under $150,000 In Value By Affidavit" should be sufficient.

    Whspanen using the Petition to Determine Succession to Real Property procedure, the following rules apply:

    1. At least 40 days must have elapsed since the death of the decedent before the affidavit or declaration is presented to the holder of the property.
    2. No administration proceedings may be pending or have been conducted or the decedent’s estate.
    3. The gross value of the real and personal property in the estate does not exceed $150,000 (excluding the allowed exceptions).
  • Transfer-on-death Registration For Vehicles. California allows transfer-on-death registration of vehicles. If you register your vehicle this way, the beneficiary you name will automatically inherit the vehicle after your death. No probate court proceeding will be necessary. Make a trip to the Department of Motor Vehicles. Name a TOD on each of your vehicles. Complete a new title application for each vehicle, listing the person of your choice as the TOD. The Department of Motor Vehicles will then issue a new title showing your TOD designation.

  • Spousal Petition. A spouse may file a spousal petition with court where an asset (regardless of type) passes under the Will or by intestate succession to the surviving spouse. The transfer occurs by way of a separate petition (generally referred to as a spousal property petition) executed by the beneficiary and filed with court. A court hearing is required. The purpose of this petition is to change the titles of the assets to the surviving spouse's ownership. The petition is a simplified probate procedure, and takes much less time than a full probate. Legal fees are usually much lower for this type of petition than a full probate.

  • Deed Delivered After the Death of the Grantor? A deed signed before the death of the owner but delivered and recorded after his or her death is sometimes suggested as a way to avoid probate of real property. It is not a will substitute, and, in fact, the transfer described above is not a legally valid transfer of real property.

    This deed usually takes the form of a quit claim deed. The use of this scheme has caused many to incorrectly consider a quit claim deed to be a will substitute. A quit claim deed is simply a deed which contains no warranties concerning the title. For a deed to effectively transfer real property, it must be delivered during the owner’s lifetime. If an owner signs a deed, but retains control of the deed during his or her lifetime, then a valid delivery has not taken place, and the deed is not operative. This scheme sometimes works because no one questions it. However, if an heir is left out of the deed he or she may challenge it in probate.

    Aside from the legal invalidity of such a transfer there may be detrimental income tax effects. In a lifetime transfer of property, the grantee takes the tax basis of the grantor. This can result in a significant capital gain on the sale of the property and ultimately increase income tax liability. When property is transferred at the grantor’s death, the property gets a "stepped-up" basis equal to the fair market value as of the owner’s death. For example, if a parent with a tax basis of $50,000 in her house makes a lifetime transfer of the house to her child, the child’s tax basis in the house is $50,000.

    If the child sells the house upon the parent’s death for the then fair market value of $100,000, the child has incurred a capital gain of $80,000. Such gain would be taxed as income of the child. If instead, the parent left the house to her child through her will or through a living trust, the child’s tax basis in the house would be the fair market value of the house on the parent’s date of death ($100,000). If the child sells the house soon after the parent’s death there would be little if any taxable capital gain.

After reading the above, you still may not be sure if you can avoid a probate in a particular matter. That is where I can be of assistance. Please contact me for a free consultation if you wish to gain more information on California probate or if you need the general assistance of a California probate lawyer. I will spend time with you to answer your questions.

I assist clients in all Southern California counties, including Imperial County, Los Angeles County, Orange County, San Bernardino County and San Diego County. You can reach me by phone at 760-989-4820, by email at wksweeney@gmail.com or through my online contact form.