How does Probate Work in California?

The term "probate" is often (rightfully or wrongfully) used in a negative connotation. For reference, probate is the judicial transfer of assets from a dead person, known as the decedent, to their heirs or beneficiaries. Typically people opt to write a trust whereby their estate will not be subject to the probate process when they pass away. While there are valid reasons to avoid probate, e.g. it is costly and time-consuming, an estate that must be probated does not result in irreparable harm. In an effort to dispel any myths or half-truths involving the probate process, the following is a brief explanation of it.

Probate can be splintered into three segments, (1) collection and appraisal of assets, (2) payment of debts and (3) distribution of the balance of the estate.

1. Collection and Appraisal of Assets

The first step is for a person to be appointed personal representative by the court to administer the estate. The personal representative can either be somebody nominated in a will, the executor, or they can be the decedent's next of kin if they wrote no will, the administrator. 

Once appointed, the personal representative has the authority to gather the decedent's assets. For example, if the decedent had a bank account, the personal representative would go to the bank and transfer it to an estate account.

When the personal representative has gathered all the assets, they can then appraise such assets. For some assets, the personal representative can appraise the asset themselves, e.g. a bank account. For other assets, the personal representative will need the assistance of a probate referee, e.g. real estate.

When the personal representative has completed collecting and appraising assets, they submit an inventory and appraisal of the decedent's estate to the probate court. 

2. Payment of Debts

Invariably the decedent will have some form of debt when they pass away. This can take the form of a credit card bill, a utility bill, a mortgage, a child support judgment, a tax lien, etc. The personal representative is required to provide notice to all creditors of the decedent's probate. Creditors then have to file a claim. The personal representative then makes a determination of whether to pay the claim or not. If there are deficiencies in the claim, e.g. it was not timely-filled, the personal representative can appropriately reject the claim. Ultimately, the personal representative needs to resolve all creditor claims before the final step can take place. 

3. Distribution of the Balance of the Estate

When all assets have been collected and appraised, all debts have been paid and a sufficient amount of time has elapsed, the personal representative can seek closure of probate.

To close probate, the personal representative will need to file a petition. It will contain a summary of what has taken place in the probate, e.g. when it started, who filed creditor claims, did the decedent have a will, how will the distribution go, etc. If the petition is approved, the personal representative can make distributions to the beneficiaries.

In light of the foregoing, people often ask "how long does probate take?" The common range is for probate to take 9-15 months to complete in most counties. From personal experience, the probates I've handled have taken between 7-12 months. The process can be longer if the matter is contested, e.g. there is a will contest. 

Apprasing an Estate

When somebody passes away, the decedent, they leave their possessions behind. For as the common refrain goes "you cannot take it with you."  In legal speak, these possessions are known as the decedent's "estate."

One of the first steps that an executor or trustee must do when administering a decedent's estate is to value the items in the estate. The principal reason why an executor or trustee needs to do this is for estate tax purposes. That is, it must be determined if the value of the decedent's estate eclipsed the estate tax exclusion amount. If the decedent's estate is under the threshold amount, no estate tax is due. Conversely, if the decedent's estate is above the threshold amount, an estate tax will be due albeit the amount will be dependent upon the amount over the threshold amount. 

Another primary reason to value the decedent's estate is because many estates are distributed in percentages. For instance, a trust might call for a 50% distribution to the daughter and a 50% distribution to the son. The trustee would be breaching their fiduciary duty to the beneficiaries if they just "guessed" as to the estate's value and distributed off of that valuation. Rather, the trustee must reasonably value each item in the estate and then distribute the estate. The following are items typically found in a decedent's estate and how to value them.

1. Home

A decedent's home is typically the most valuable asset in their estate. Hence, it is critical that the executor or trustee accurately value the home's value. The best method to value a home is to retain a licensed California real estate appraiser. While the temptation is their to use an online resource such as Zillow to save time and money, this temptation, much like almost all temptations, is best avoided. The crux is that Zillow's algorithm does not account for physical features inside and around the home. A real estate appraiser can spot a shoddy roof or the noise of rush-hour traffic, whereas Zillow's algorithm cannot. Though personally I use Zillow, I would never advise a client to use it as a basis for a home appraisal.

2. Bank Account

This is probably the easiest asset to value. If you are literate you can figure out how much money the decedent had in their bank account when they died. I trust you. 

3. Car

The bible for valuing a used car is Kelley's Blue Book. Though there are other resources, the KBB is the most popular guide for determining used car values. Personally I have used the KBB a few times when buying and selling a car. I have been very pleased with it.

4. Stocks

The advent of the Internet has made it much easier to gauge the price of a stock on the day the decedent died. Whereas in the past an executor or trustee might have to go to the library to locate an old newspaper to look up the stock price, the Internet has rendered this practice obsolete. Since stock prices can easily be found using Yahoo or Google Finance, an executor or trustee's job has been made much easier in this instance. A stock price is now just a proverbial click away.

However, if the decedent owned stock that was not publicly traded, a business appraiser will be needed.

Annual Gift Tax Exclusion Amount for 2013

"Gift" is the painting's title

For the past couple of years the annual gift tax exclusion amount was $13,000. This meant that a person could gift up to $13,000 to another person without (a) having to file a gift tax return and utilizing a portion of their lifetime gift tax exemption amount or (b) filing a gift tax return and paying the gift tax in order to avoid a loss of a portion of their lifetime gift tax exemption amount. Of note, the gift tax applies to any type of property transfer, personal, real, intangible, etc. IRC §2511(a) Thus, the transfer of stock, a home or a musical copyright would count as a gift if certain conditions were met.

In October, the IRS announced that the annual gift tax exclusion amount for 2013 would be $14,000. The reason for the increase is to reflect inflation. In prior years, inflation did not merit an increase in the exclusion amount.

There is no California gift tax. Hence, the increase only affects the federal gift tax.

It should be noted that certain items are not subject to gift tax regardless of the size of the gift. For example, gifts made to charity, payment of medical expenses, payment of school tuition and intra-spousal gifts are all considered exempt from the gift tax. This means that a person could pay the entire tuition costs for a student attending McGeorge School of Law for Spring 2013, $21,486, and not have to worry about any gift tax liability or ramifications. I use McGeorge as a reference because I went to school there.

As of this writing, there has been no legislation affecting the estate and gift tax regime for 2013. For both of these items, the exclusion amount for 2012 is $5.12M. If no legislation is passed, the estate and gift tax will revert back to $1M exclusion limits for each. Still, the last time the estate and gift tax was addressed occurred in December 2010 in a lame duck session of Congress. Hence, just because it is the 11th hour, it does not mean that nothing will be enacted. 

So while the annual gift tax exclusion amount for 2013 has been addressed, the more important lifetime exclusion amounts for both gifts and estates remain a mystery. Ultimately, something will occur in the next month or so. Either the estate and gift tax will be amended to increase the lifetime exemption amount or nothing will happen and each will revert back to $1M. An optimist would say that at least some resolution will be reached shortly.