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Here are some common questions associated with probate.
1. What is probate?
In short, probate is a court-supervised procedure for collecting a deceased person's assets, paying debts and taxes to the appropriate parties, and distributing the remaining property to the person's beneficiaries.
The distribution of the beneficiaries’ property is accomplished through either the instructions the person set forth in their will or as determined by state law if the person died without a will, which is called “intestacy.” Conversely, if you die with a will, you die “testate.”
2. When does probate occur?
Generally speaking, probate occurs when a person passes away and their estate is comprised of assets totaling more than $100,000 which are not subject to non-probate transfers or held in a revocable trust. Non-probate transfers would include life insurance contracts, assets held in joint tenancy, pay-on-death bank accounts, transfer-on-death stocks, etc.
3. If I write a will can I avoid probate?
No, all wills are probated. Thus, writing a will would not prevent your estate from being probated.
4. Why do people try to avoid probate?
The two main reasons why people would like to avoid probate is due to the time and cost involved. See Questions #5 and #6.
5. How long does probate last?
It is difficult to definitively state how long probate will last because the probate timeline is driven by the amount of court filings in each county’s superior court and the probate’s complexity. For instance, in a simple probate in a smaller county such as Modoc or Alpine, probate could be completed in as little as 6-8 months. Conversely, in a larger county such as Los Angeles or Santa Clara with a more complex probate, the process could easily take 12-14 months to complete.
6. How much is the attorney and personal representative compensated?
The amount of compensation is based off of the value of the person’s estate, which is basically everything they own. Prob C §§ 10800, 10810. The attorney and personal representative are, generally speaking, compensated in the same manner as provided for below:
Estate Value Fee for Attorney and Personal Representative
$100,000 $4,000
$200,000 $7,000
$300,000 $9,000
$400,000 $11,000
$500,000 $13,000
$600,000 $15,000
$700,000 $17,000
$800,000 $19,000
$900,000 $21,000
$1,000,000 $23,000
Furthermore, the fees for both the attorney and personal representative may go higher for extraordinary services such as selling a house, defending a will contest, or litigating a matter. Prob C § 10811.
What is particularly important about the estate value calculation is that encumbrances, such as a mortgage, are not included in the probate calculation. Prob C § 10810(b). Thus, if the decedent had a house worth $500,000 on the date of death but had a mortgage of $300,000 on the property, the probate estate would be valued at $500,000 not $200,000. This is a significant difference because the fee for $500,000 is $13,000 while the fee for $200,000 is $7,000.
6. What happens if probate is not needed?
There are numerous procedures that are used in lieu of the formal probate process: small-estate affidavit, spousal property petition, non-probate transfers or trust administration.
7. How many steps are needed to complete the probate process?
The answer to this question varies because there are a few probate filings that are not mandatory. Thus, one probate might include the optional filed document whereas another probate will not. If you are really bored, you can call my office and I can pull out my probate checklist from my desk and rattle off the required probate steps to aid your boredom.
8. What is the first step in the probate process?
The first step in the probate process is to lodge the decedent’s will with the local probate court.
9. What is the last step in the probate process?
The last step in the probate process is to transfer the assets from the decedent’s estate to the beneficiaries. This can be done only after numerous steps have been completed however.
10. What is a personal representative?
A personal representative is the individual entrusted with executing the probate process from start to finish.
11. How is a personal representative chosen?
A personal representative is usually chosen through either designation in a will or if the decedent wrote no will, then through a next of kin formula found in Prob C § 8461. This next of kin formula basically says that the closest relative to the decedent has priority to become the personal representative.
12. Can the personal representative be removed?
Yes, just as a trustee of a revocable trust can be removed, so too can a personal representative. For example, per Prob C §8502, the personal representative may be removed in the following situations:
- The representative has wasted, embezzled, or mismanaged the estate property, or committed a fraud on the estate or is about to do so;
- The representative is incompetent to act;
- The representative has wrongfully neglected the estate;
- The representative has long neglected to perform any acts as representative;
- Removal is necessary for protection of the estate; or
- The representative is subject to removal for any other cause provided by statute
13. Can you make an early distribution of a probate estate?
Yes, a personal representative may petition the probate court to allow an early distribution of the probate estate. Prob C §11620. Although, the aggregate amount of all property that can be distributed is limited to 50 percent of the net value of the estate. Prob C §11623(a)(2). Thus, in the case of a $1,000,000 probate, the personal representative could not distribute more than $500,000 to the beneficiaries.
Otherwise, the distribution of the estate can only occur after probate has been completed.
14. Are there advantages to probate?
Yes, there are advantages to probate. If an attorney ever tells you that there is nothing positive about probate, they are fibbing.
For example, since probate is a court-supervised process, the beneficiaries can be assured that the personal representative will faithfully execute their duties or else suffer monetary punishment. However, given the time and cost involved with probate, the disadvantages of probate outweigh its advantages typically.
15. What role does an attorney serve during probate?
The attorney’s role is to supervise the personal representative during the execution of his or her duties. Consequently, the attorney will make sure that the personal representative is filing the right documents at the appropriate time in the correct fashion.
There is no requirement that an attorney be hired to assist a personal representative in handling a probate. However, it is preferable because the practice of law is what lawyers are trained to do. Or at least that is what I was told in law school. In contrast, the personal representative often has little exposure to the legal realm other than what they have seen on television or in the movies, which is often times a gross exaggeration of reality. Sad but true.
16. How common is probate?
Probate used to be the dominant form of post-death administration for a decedent’s estate.
However, due to prevalence of revocable trusts (“living trusts”) which are exempt from probate and non-probate transfers such as pay-on-death bank accounts, the frequency of probate is gradually decreasing.
17. When will probate typically occur?
The easiest way for a probate to be required is for an individual to own their home in their individual capacity and die with or without a will. For example, if John Smith was the sole owner of 2176 El Capitan Ave Santa Clara, CA 95050 and died, a formal probate would be required because the home’s value would exceed $100,000 and the home was not held in joint tenancy or transferred to a revocable trust. Thus, John’s personal representative would need to navigate the probate process in order to distribute the house to John’s beneficiaries.
One of the sacred cows in California politics is Proposition 13. Proposition 13, the “People's Initiative to Limit Property Taxation" was the landmark ballot proposition that was passed overwhelmingly by California voters in 1978 which capped property tax rates and annual assessment increases for realty.
Simply stated, Prop 13 caps the maximum taxation rate for realty at 1% and the maximum increase for an assessment at 2% annually.
The tax rate of 1% signifies the multiplier each county uses when calculating property taxes for each piece of real property. The assessed value is the amount multiplied by that 1% tax rate, which in turn provides the amount of property taxes due annually. For example, if Paul purchased a home for $100,000, the maximum amount Paul could be charged for property taxes is $1,000 (100,000 x .01) and the assessed value could not be increased by more than $2,000 for the following year, $102,000.
It should be noted that there are numerous taxes or fees tacked onto your property tax bill each year that are not subject to Prop 13’s jurisdiction, these include schools bonds, public safety bonds, retiree benefits, etc.
The assessed value of realty is, generally speaking, the fair market value of the property as of the last sale date plus annual increases not to exceed 2%. From the example above, Paul purchased a home for $100,000. The amount of property taxes due would probably go as follows
Assessed Value - Year 1 Property Taxes Owed – Year 1
$100,000 $1,000
Assessed Value - Year 2 Property Taxes Owed – Year 2
$102,000 $1,020
Assessed Value - Year 3 Property Taxes Owed – Year 3
$104,004 $1,040.04
Assessed Value - Year 4 Property Taxes Owed – Year 4
$106,120.8 $1,061.208
Assessed Value - Year 5 Property Taxes Owed – Year 5
$108,243.16 $1,082.43
Assume that Paul had a neighbor, Ned, who purchased his home in Year 4 for $200,000. Ned’s property taxes would roughly be double Paul’s because the assessed value of Ned’s home is roughly twice the amount of Paul’s home. Thus, despite the fact that Paul and Ned are neighbors, Paul pays significantly less than Ned in property taxes. This example illustrates how purchasers of realty in California enjoy significant property tax savings if they can retain ownership of the realty for a long duration of time. Although this argument is based off of the assumption that California real estate prices increase over time, you would be hard-pressed to find a dissenting opinion from a reputable source.
The key phrase for property taxes is “change in ownership.” Whenever there is a “change in ownership” then the property’s value will be re-assessed. The assessed value is usually pegged to the fair market value of the home (see sale price) on the date of transfer.
The following are some examples of transfers which present “change in ownership” questions:
Business Entity/Proportional Interest
Henry and Whitney purchased a rental property, Hotel California, as joint tenants in 1988. Upon seeing that a LLC is a superior method of owning Hotel California, Henry and Whitney create a LLC, Acme LLC, in which Henry will have a 50% interest and Whitney will have a 50% interest. Later on, Henry and Whitney each transfer their 50% interest in Hotel California to Acme LLC. Since the proportional interests in the realty remain exactly the same both before and after the transfer, there is no change in ownership. Rev & T C §62(a)(2).
Joint Tenancy
Al purchases a fabulous retirement home in Scotts Valley, a charming community nestled in the Santa Cruz Mountains. Al then decides to gift half of his interest in the home to his neighbor Jefferson. Al prepares and records a deed naming Al and Jefferson as joint tenants for the retirement home. This transfer from Al to Al and Jefferson as joint tenants does not constitute a change in ownership. Rev & T C §62(b),(f).
Divorce
Eldrick and Elin decide to part ways after many years of marriage. One of the marital assets is a home owned in joint tenancy by Eldrick and Elin. The separation agreement provides that Eldrick will transfer to Elin the marital home. The transfer from Eldrick to Elin of the marital home will not result in a change in ownership. Rev & T C §63(c).
Leases
Link, a landlord, owns a piece of farmland in the fertile San Joaquin Valley named Big Gulch Road. Tobias, an entrepreneurial farmer approaches Larry and inquires about leasing Big Gulch Road. Tobias has grand plans for Big Gulch Road and thus needs at least a 50-year lease in order to complete his plans for harvesting pomegranates, the best fruit on earth (author’s opinion). Larry agrees to lease to Tobias Big Gulch Road for a term of 50 years. This lease would constitute a change in ownership because the lease term exceeded 35 years. Rev & T C §61(c). However, if the lease term had been for less than 35 years, then there would not be a change in ownership. Rev & T C §61(c).
Tenants in Common
John, Paul, Ringo and George purchased a home together, Nabbey Road Manor. John later becomes fed up with having to co-own the property with 3 other people and decides to sell his interest, 25%, to his eccentric consultant Yoko. This transfer would result in a change in ownership, albeit a partial one. In that, 25% of the property would be re-assessed for property tax purposes whereas the other 75% would maintain its assessed value. Rev & T C §§61(f), 65.1.
Name Change
Romeo Shakespeare purchased a home in Markleeville, California and took title under said name. Since Romeo’s friends, family and neighbors loved to poke fun at this name, Romeo decided to file a petition with the Alpine County Superior Court to change his name to John Brown. Eventually, Romeo was able to have his name changed. Subsequently, John executed a new deed in which Romeo Shakespeare conveyed to John Brown his interest in the property. Due to the fact that this transfer involved only a name change, no change in ownership occurred. 18 Cal Code Regs §462.001.
Since writing a post about special needs trusts a few months ago, I noticed that it has been a common reading item. In response, here are some additional issues that arise in the special needs trust context.
1. How does a disabled-beneficiary qualify for public assistance?
A disabled-beneficiary may qualify for public assistance through two methods: needs-based or entitlement. For needs-based, a disabled-beneficiary will qualify out of necessity so to speak. For example, food stamps are an example of a needs-based public benefit because only those with very modest incomes are eligible to receive food-stamps. Conversely, an entitlement public benefit is where the recipient qualifies just for the sheer fact that they are a member of a certain class of individuals. For instance, Medicare is an example of an entitlement benefit because anybody 65 or older will qualify.
Needs-based public benefits include Supplemental Security Income (SSI) and Medi-Cal, while entitlement benefits include Social Security Disability Insurance (SSDI) and Medicare. Since SSI and Medi-Cal are needs-based public benefits, a recipient of those public benefits will require a special needs trust in order to maintain eligibility should they be the beneficiary of some other person’s estate plan.
2. What are some important on-going requirements for a special needs trust?
Two important on-going requirements of a special needs trust are tax returns and accounting.
Generally speaking, a special needs trust must file a California tax return if the net taxable income is over $100 or the gross income exceeds $10,000, regardless of the net taxable income. Rev & T C §18505(e)-(f). A federal tax return must be filed if the trust has any taxable income or has gross income of $600 or more, regardless of the amount of taxable income. IRC §6012(a)(4). Since this involves a microscopic threshold, it is almost certain that any trust with require the filing of a federal and state tax return.
As for the accounting, a special needs trust needs to periodically provide an accounting to each disabled-beneficiary. The frequency of the accounting is dependent upon whether or not the trust is court-supervised. If the trust is not court-supervised, then the trustee must annually account to the disabled-beneficiary unless the trust instrument provides otherwise or the disabled-beneficiary waives such right in writing. Prob C §16062; Prob C §16064(a); Prob C §16064(c). If the trust is court-supervised, then the trustee must account no less frequently than biennially, unless otherwise ordered by the court. Prob C §2620(a). In most cases, an annual accounting will be required.
3. What happens to the trust assets after the passing of the disabled-beneficiary?
The main consequence is that the State may entitled to reimbursement for the Medi-Cal coverage it provided the disabled-beneficiary. The answer depends upon whether the trust is first-party or third-party.
A first-party trust is one personally created by the disabled-beneficiary. An example of this would be where a disabled-beneficiary was the recipient of a large court settlement which would otherwise jeopardize their eligibility for public benefits if not for the creation of the special needs trust. A third-party trust is one created by a person other than the disabled-beneficiary. An example of this would be where parents create a trust for their disabled child.
If the trust is a first-party special needs trust, federal law requires that "the State will receive all amounts remaining in the trust upon the death of such individual up to an amount equal to the total medical assistance paid." 42 USC §1396p(d)(4)(A). This is known as Medi-Cal reimbursement. Basically, the State will recoup all the money it has provided the disabled-beneficiary over the years through Medi-Cal.
However, if the trust is a third-party special needs trust, then there is no Medi-Cal reimbursement.
4. Can a special needs trust be terminated?
Yes, a special needs trust could be terminated for a number of reasons. For instance, the disabled-beneficiary could pass away, the trust assets could run out or the disabled-beneficiary could lose their eligibility for public benefits despite the creation of the special needs trust.
5. Can a special needs trust purchase a home with maintaining the disabled-beneficiary’s eligibility for public benefits?
Yes, a special needs trust can purchase a home while maintaining the disabled-beneficiary’s eligibility for public benefits. Federal and California law says that a personal residence is an exempt asset and will not be counted against the disabled-beneficiary for eligibility purposes. 20 CFR §416.1212 (SSI); 22 Cal Code Regs §50425 (Medi-Cal). However, there are a multitude of issues that would confront a trustee during the process. First, the trust would require liquidity in order to purchase a home. Second, the trustee would most likely need to procure financing for the home purchase. Third, the trustee would need to allocate the responsibilities for improvements and repairs to the home amongst the affected parties.
6. How long does a special needs trust last?
Generally speaking, a special needs trust will last for the lifetime of the disabled-beneficiary.
7. How does a trustee make a distribution to a disabled-beneficiary?
There are a couple of ways in which a trustee could make a distribution to a disabled-beneficiary. For illustrative purposes, assume that the trustee would like to buy the disabled-beneficiary a couch. The trustee could purchase the couch personally and have it delivered to the disabled-beneficiary, or the trustee could purchase a furniture store gift card which they would later provide to the disabled-beneficiary.
8. Can the attorney who writes the special needs trust be the trustee?
Yes, theoretically the drafting attorney could serve as the trustee but given the legal hurdles that must be cleared, it is doubtful that a prudent attorney would serve as trustee. One reason why this situation is problematic is because the attorney is considered a “disqualified donee”, whereby the approval of another attorney is needed to cure the perceived conflict of interest. Another reason why an attorney-trustee is undesirable is because the attorney would typically not be entitled to compensation as both trustee and attorney, double-dipping. Prob C §15687. Hence, even though the attorney would serve two roles, they would only be compensated for one role.
9. Is court supervision of a special needs trust mandatory?
No, there is no requirement that a special needs trust be subject to the continuing supervision of a local superior court. Consequently, this means that parents could establish a special needs trust for their child and the trust’s administration would never require the approval of court order.
A power of attorney is a legal term that many people have heard of because of its occasional use in everyday life. For example, it is not uncommon for somebody (the principal) to grant to their friend (the agent) the authority to sign for them on the sale or purchase of a home if they unexpectedly have to leave the area. This aforementioned example has been used by my relatives numerous times.
However, there are very serious consequences when executing or allegedly executing a power of attorney, as illustrated by the following two cases. The point behind these two cases is to highlight the dangers of a power of attorney as due to the regular use of a power of attorney it is easy to mistakenly assume that a power of attorney is a simple legal document with minimal power. Thus, one should play close attention wherever they hear the term “power of attorney” lobbed around in a conversation due to its significant legal ramifications.
Estate of Kraus (2010) 184 CA4th 103
On October 22, 2006, Janice Kraus, who was stricken with terminal cancer and semi-comatose, executed a power of attorney in favor of her brother David whereby David would serve as Janice’s agent. The very next day, October 25, 2006, David withdrew $197,402 of Janice's money from various bank accounts and deposited the funds into accounts held by David and David’s wife.
One of the accounts was owned in joint tenancy by Janice and her mother, and other accounts had pay-on-death beneficiaries. Thus David would not inherit any of the money in Janice’s bank accounts. Janice’s estate plan included a revocable trust and pour-over will. The trust beneficiaries were the Regents of the University of California and the Make-A-Wish Foundation.
On October 24, 2006, Janice passed away and shortly thereafter the trust beneficiaries of Janice’s estate came looking for David in light of his conduct. In response to allegations of misappropriation, David, surprisingly, denied that he was guilty of any wrongdoing. Undeterred by David’s brazen denial, the trust beneficiaries sued for return of the funds that David has misappropriated, $197,402 and also sued for double damages, $394,804, because David had allegedly misappropriated Janice’s property in violation of the California Probate Code. Prob C §859. Ultimately, in light of David’s wrongdoing, David was ordered to deliver $197,402 plus the statutory penalty of $394,804 to a court-appointed personal representative of the estate that was to be distributed to Janice’s beneficiaries.
Jackson v. County of Amador (2010) 186 CA4th 514
Jewel Jackson owned two rental houses in Ione, California. Ione is an old gold-mining town in the County of Amador situated on the foothills of the Sierra Nevada Mountains.
Willie Norton, Jewel’s brother, executed a fraudulent power of attorney whereby Norton would serve as Jackson's agent. The problem with the power of attorney was that Jackson never signed the document as the principal and thus Norton was never appropriately granted the authority to act as Jackson’s agent. Nevertheless, Norton subsequently executed two quitclaim deeds in which Norton, purporting to act as Jackson's agent, transferred the two rental houses from Jackson to Norton. Of note, this would be a classic case of “self-dealing.”
Norton then demanded that the tenants vacate the houses for reasons unknown. This caused Jackson to incur a loss of rental income, and in turn. Jackson was unable to timely make her mortgage payments for the two properties. Ultimately, Jackson was able to have the deeds recorded by her unscrupulous brother cancelled albeit after paying thousands of dollars in attorney fees.
When two people divorce, or legally speaking dissolve their marriage, there are serious consequences for their estate plans, assuming they have one.
For illustrative purposes, assume that Harry and Wendy married in 1985 and divorced in 2010. During their marriage, the couple had two children, Samuel, born in 1988, and Donna, born in 1990. During the course of their marriage, Harry and Wendy executed various estate planning documents.
For example in 1995, Harry executed a will in which he bequeathed his Monet oil painting to Wendy as the primary beneficiary and his brother Bob as the alternate beneficiary. Furthermore, Harry inherited some money from a distant heir and deposited the money into a bank account in his name alone and made Wendy the pay-on-death primary beneficiary and Samuel the pay-on-death secondary beneficiary. Moreover, Harry and Wendy owned their home as joint tenants and never changed the title even after the divorce. In 2010 Harry and Wendy sadly divorced, and then in 2011 Harry passed away.
Will
Generally speaking, California law says that upon divorce, all provisions in a will that benefit a former spouse are revoked and the will is interpreted as though the former spouse had predeceased the testator and hence are not entitled to inherit from their former spouse. Prob C § 6122.
Here, since Harry had divorced Wendy, California law says that Wendy died before Harry (just ignore reality and embrace the legal system for a moment) and thereby Harry’s brother Bob would be entitled to the Monet because Bob survived Harry.
Bank Account
Generally speaking, California law invalidates a nonprobate transfer (which is what a P.O.D. account is) to a former spouse. Prob C §5600(a). Here Harry named Wendy as the P.O.D. beneficiary but later divorced her and thus Prob C §5600(a) would apply, whereby Wendy would not receive any proceeds from the bank account and instead Samuel would.
Home (Joint Tenancy)
Generally speaking, California law says that a joint tenancy between the decedent (the person who died) and a former spouse is severed if the former spouse is not the decedent’s surviving spouse at the time of death. Prob C § 5601.
This is particularly important because many couples own their homes as joint tenants. For instance, roughly 3 out of every 4 deeds I see from clients who are couples are titled as joint tenants. Regardless, upon the death of one joint tenant, the surviving joint tenant automatically inherits the deceased joint tenant’s interest regardless of what a will or revocable trust dictates. Yet here, because Wendy was not Harry’s spouse at the time of his death, Wendy would not be entitled to inherit Harry’s interest in the property as the surviving owner, since their divorce severed the joint tenancy between the two and made them tenants in common. Consequently, unlike joint tenancy, a tenant in common does not automatically inherit the interest of a deceased tenant in common. So Harry’s heirs would need to go through probate in order to inherit Harry’s half of the property.
One of the required elements of a California revocable trust is that the trust be funded with some piece of property, whether real or personal. Prob C §15202.
Often times, a person who creates a trust without the assistance of counsel will fail to formally transfer their assets into the trust because they are either unaware of the requirement or are unsure as to how to effect the transfer from themselves as an individual to themselves as trustee of their trust.
A famous California probate case was the result of the failure to formally fund a trust. In Estate of Heggstad (1993) 16 CA4th 943, the trust drafter failed to formally transfer his home into his revocable trust but his revocable trust included a declaration of trust in which it listed his home as an asset of the trust. The Heggstad opinion said that this declaration of trust was sufficient to transfer his home into the trust even though he never formally transferred his home through a deed into the trust. Consequently, many California attorneys now file Heggstad petitions on behalf of their clients to formally transfer an asset, namely a house, into the decedent’s trust so as to avoid probate. Prob C §850.
Recently a California appellate court decision has expanded the reach of Heggstad petitions to include personal property, namely shares in a public held company. Kucker v. Kucker.
In Kucker, the mother owned the shares of numerous companies and created a trust which was funded by a general assignment in which she assigned all of her interest in said shares to her trust. However, the mother failed to specifically name one of the companies she owned shares in, Medco. Consequently, the beneficiaries petitioned the local probate court to confirm that the shares of Medco were a trust asset so as to avoid probate. While the trial court ruled that the Medco shares were not trust assets, this decision was reversed by the appellate court.
It found that “there is no California authority invalidating a transfer of shares of stock to a trust because a general assignment of personal property did not identify the shares.” Kucker v. Kucker. Thus, the appellate court ruled that the shares of Medco was a trust asset and no probate was needed even though the value of the asset was greater than $100,000.
Heggstad and Kucker illustrate the importance of properly funding a revocable trust because the failure to do so can result in a significant time delay in distributing a person’s estate and in large attorney fees. For example in Kucker, the decedent passed away in November 2009 yet the decision by the appellate court was not rendered until January 2011.
Furthermore, it is likely that the participants in Kucker had to spend at least $5,000 in attorney fees to litigate their issue first at the trial court level and then at the appellate court level. Similarly in Heggstad, the decedent passed away on October 20, 1990 but litigation did not conclude until June 21, 1993, when the appellate court rendered their decision. Moreover, the cost to file the original petition and then appeal the trial court’s decision most likely cost the beneficiaries thousands of dollars in attorney fees.
In case you are wondering about the colored picture of California on the right, the Kucker decision was reached by the Second Appellate District which is shaded green, while the Heggstad decision was reached by the First Appellate District which is shaded blue.
