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.

For do it yourself (“DIY”) ways to avoid probate in California please refer to my article at:

https://www.sweeneyprobatelaw.com/diy-resources/

It would be prudent to do introduce yourself to estate planning and learn the various ways to avoid probate. There are resources available on Amazon.com, such as:

• “Plan Your Estate” using the following Amazon.com link: https://amzn.to/3U37eDG
• “8 Ways to Avoid Probate Fourteenth Edition” using the following Amazon.com link: https://amzn.to/3L4be2t
• “Every Californian’s Guide to Estate Planning” using the following Amazon.com link: https://amzn.to/3L9I425
• “The Complete Book of Wills, Estates & Trusts (4th Edition)” using the following Amazon.com link: https://amzn.to/3RVU6OL

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. Four 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.

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) Spouses may also hold property as community property with right of survivorship. (See Civil Code §682.1). 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 but is controlled by the decedent’s Will. With right of survivorship, on the death of one joint tenant or spouse, the asset is owned entirely by the surviving joint tenant or spouse. 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 property 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.

By Multi-Party Account Laws. (Probate Code §§5100 – 5401). 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. At your death, the beneficiary can claim the money directly from the bank, without probate court proceedings. Probate Code §§5100 – 5401 generally determine who owns the funds within a bank account, although the contract establishing the account (usually the signature card) can vary the rules. These 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 financial institution in turn generally opens a new account in the name of the surviving individual(s).

The decedent’s Will does not control the distribution of the funds, and no probate is required.

In addition, California lets you register stocks and bonds in transfer-on-death (TOD) form. People commonly hold brokerage accounts this way. If you register an account in TOD (also called beneficiary) form, the beneficiary you name will inherit the account automatically at your death. No probate court proceedings will be necessary; the beneficiary will deal directly with the brokerage company to transfer the account.

By contract including beneficiary designation. The California Probate Code contains the Nonprobate Transfer Rules, which are found in California Probate Code §§ 5000 – 5705. The rules provide a broad endorsement to transfers on death by way of beneficiary designation. The owner of an account can designate a person to inherit it upon their death. While the owner retains control while alive, the property transfers to the named beneficiary upon the owner’s death.

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). The Nonprobate Transfer Rules also endorse the transfer of death of securities through specific registration as “TOD” (transfer on death) or “POD” (pay on death). On the death of the owner of the security, the security passes to the beneficiary named on the instrument (or named on account) as the payee. This transfer is accomplished by providing a death certificate (and other documentation) to the transfer agent for the security. The decedent’s Will does not control the distribution, and no probate is required.

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. 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. The probate avoidance feature is recognized in California under the California Nonprobate Transfer Rules. (See California Probate Code §5000(a)).

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 child 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.

By summary probate procedure. For decedents who died prior to April 1, 2022 the California Probate Code provides that probate estates of $166,250 or less do not need to be probated. Deaths on or after April 1, 2022 the threshold amount is $184,500. If the estate consists of assets in excess of the prescribed amount a probate is necessary. The threshold 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 the threshold amount, 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.

Estates valued at less than the threshold amount are administered by preparing affidavits which are presented to the various institutions (banks, brokerages, etc.) that hold the assets. Transfer by summary probate procedure is generally much quicker and less costly than a conventional probate, even when some court action is required. The types of estates, which may be transferred pursuant to one of the summary probate procedures, include estates:

With personal property not exceeding the threshold amount in aggregate value. (See California Probate Code §§ 13100 – 13116). Transfer occurs by way of an affidavit (referred to generally as a small estate affidavit or 13100 affidavit), signed by the beneficiary under the decedent’s Will and presented to the financial institution. No court filing is required.

For decedents who died prior to April 1, 20230, with real estate of less than $55,425, transfer occurs by appraisal and an affidavit (referred to generally as a small estate affidavit for real property or a 13200 affidavit) executed by the beneficiary and filed with the court. No court hearing is required. Deaths on or after April 1, 2022 the threshold amount is $61,500.

Otherwise, with real estate of less than the threshold amount of $166,250 or $184,500, as applicable, (See Probate Code §§13150- 13158) transfer occurs by appraisal and a separate petition (referred to generally as a petition for succession to real property or a 13150 petition) executed by the beneficiary and filed with the court. A court hearing is required.

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. (see California Probate Code §§13500 – 13660). 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 done 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 $20,000 in her house makes a lifetime transfer of the house to her child, the child’s tax basis in the house is also $20,000.

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.

CONTACT SWEENEY PROBATE LAW FOR AN INITIAL CONSULTATION

Understanding the issues discussed in this article requires the assistance of a qualified probate attorney who can better assess the appropriate course of action. If you are the executor or other nominated person in a Will and you wish to gain more information please contact me for a free consultation. I will spend time with you to answer your questions.

From my office in Southern California, I represent families in all California counties, including Southern California Counties such as Imperial County, Los Angeles County, San Bernardino County, and San Diego County. I also represent parties residing outside of California, including foreign countries, that have probate matters affecting real and/or personal property in California.