“Grief is,” as noted by Queen Elizabeth II, “the price we pay for love.” And mourning the loss of a loved one is one of the most difficult experiences most people go through. During that trying period, surviving family members are also faced with what can be, to the uninitiated, an unfamiliar and potentially intimidating task—managing a departed loved one’s estate. In California, this process can be very complicated and the California estate administration process will vary depending on whether a probate or trust administration or both is needed. Today’s article will thus provide a broad overview of all aspects of California estate administration, probate and trusts as a way to get you started in navigating this complicated area.
California Estate Administration from Probate to Trusts
A decedent’s estate consists of all the assets he or she owned at the time of death. If an estate is well organized as a result of effective California estate planning, things may be much easier. Administering any estate involves, among other things, ensuring that all of those assets end up in the hands of the correct heirs, as determined by the decedent’s will and state law, and that valid obligations of the estate are appropriately reimbursed. It’s a regulated process and can be time-consuming and highly involved. But it’s not insurmountable for most reasonably capable people with a little help from a knowledgeable adviser.
Personal Representatives in California Estate Administration
In California, as in most states, the legal process through which an estate is administered under the supervision of a court is known as probate. At the beginning of the probate process, a personal representative is appointed to manage and act on behalf of the estate. If the decedent had a will, the representative is the “executor” named in the will. If the decedent did not leave a will, the probate court will appoint an “administrator,” usually a close family member, to act as personal representative. When the California estate administration involves a trust, the “trustee” is the functional equivalent of the personal representative with respect to the property held in the trust and the trust’s beneficiaries.
The specific tasks entailed in estate administration can vary considerably from estate to estate, depending in large part on exactly what property is included and which, if any, estate-planning techniques the decedent used. In general, personal representatives act for the estate in legal matters and ensure estate property is properly secured and maintained until distributed to the heirs. Once appointed, he or she has a fiduciary duty to the estate and to the decedent’s heirs, and must act diligently and honestly and look out for their best interests. A trustee likewise has a fiduciary obligation to the beneficiaries of a trust.
The California Probate Code establishes a statutory scale for measuring compensation of the personal representative of an estate that goes through probate. However, it is not uncommon for executors and administrators to waive payment, particularly if they are also beneficiaries of the estate. Any compensation from an estate is taxable income, but amounts paid out of the estate as an inheritance are not taxed. In some cases, a trustee is also eligible for compensation, depending on the language of the instrument creating the trust.
Along with administering the probate estate, an executor’s duties also include attempting in good faith to carry out the decedent’s wishes, as stated in the will, or as can be reasonably ascertained from the decedent’s prior statements and records. This can include matters like funeral and burial instructions, anatomical donations, and arrangements for the care of animals.
The Probate Process in California
A California estate administration in probate involves a five-phase process, with some details depending on whether the decedent died testate (i.e., with a will) or intestate (i.e., without a will). The first step is opening the probate case, which involves admitting the will, if any, to probate and appointment by the court of the personal representative. Then, the representative gathers information and provides notice to beneficiaries and creditors; followed by a careful inventory of estate assets. Next, creditor claims are reviewed and, if proper, paid by the estate. And, finally, distributions are made to beneficiaries.
Before looking at the individual steps in detail, it’s worth noting that California law provides a few short-cuts that facilitate quicker and easier administration of some or all assets. For inheritances of surviving spouses, a Spousal Property Petition allows for quicker and simpler administration, saving time and expense. If the decedent was intestate, or if the surviving spouse is the only beneficiary of the will, community property inherited by the survivor transfers directly to the surviving spouse based on the petition. Separate property and assets bequeathed to heirs other than the surviving spouse—including the decedent spouse’s 50% interest in community property if left to someone else—must still go through probate.
Along similar lines, small probate estates, defined as less than $150,000 in value, are usually eligible for administration without the full, formal probate process. Small estate assets are transferred based on affidavits executed by heirs and acknowledgements signed by the personal representative. The streamlined process saves significant time and expense compared to customary probate proceedings. Importantly, the $150,000 limit only applies to assets within the probate estate. Some assets transfer automatically outside of probate or are not technically owned by the decedent, such as assets held in trust. For example, an IRA with a beneficiary designation won’t count toward the $150,000 cap because it is not technically in the “probate estate.” We’ll discuss strategies for avoiding probate below.
California Estate Administration and Probate
Upon the death of a testator (the person who executed the will), the named executor submits the will, with a petition for probate, to the probate court of the county in which the decedent most recently resided. The filing fee varies by county but is usually around $400 – $500. Under California law, a will submitted to probate must be an original document, so it’s a good idea to retain more than one duplicate original (not photocopies), one of which is kept by the executor. If the decedent did not leave a will or if the will was lost or destroyed, a close relative files a petition asking for appointment as administrator, and the estate is considered intestate.
Once the probate court determines that the will is valid and the executor is eligible for the position, the court will issue a letter of administration formally appointing and empowering the executor to act on behalf of the estate. If the decedent is intestate, the letter appoints the administrator, though interested parties will have the opportunity to contest the appointment.
Whether an executor or administrator, the appointed personal representative now has the authority to act for the estate in a multitude of ways, including issuing payments, taking custody of and maintaining estate property, selling assets as appropriate (though real estate sales require court approval), paying taxes and bills, and entering into contracts. Personal representatives are also authorized to hire professionals on behalf of the estate. Probate attorneys, accountants, and appraisers can all be exceptionally helpful in successfully administering an estate.
An executor’s duty and authority to safeguard estate property might include storing valuable jewelry in a safe deposit box or secure safe and arranging for upkeep and maintenance of real estate. A personal representative also opens a bank account in the estate’s name to hold cash assets and pay the estate’s taxes, bills, and eventual creditor claims.
Information Gathering for Probate
During the information gathering phase, the personal representative meticulously identifies and collects the information needed for administration. He or she identifies, among other things, potential beneficiaries, creditors, and assets of the estate. To make this part a little easier, it’s usually a good idea for a testator to name an executor who is fairly familiar with the testator’s family life and financial affairs. Some investigative work will probably still be necessary, but the task is less of a chore if the representative starts with a reasonably good understanding of the decedent’s situation.
After identifying beneficiaries and creditors, the personal representative provides them with notice of the estate’s opening. California’s Probate Code requires creditor notices to be sent within four months after appointment or within 30 days of the representative learning of the creditor’s potential claim, whichever is later. Creditors then have the longer of sixty days from the notice or four months from the representative’s appointment to file claims against the probate estate.
If a decedent was receiving Social Security benefits, the representative also needs to provide notice to the SSA.
Taking Inventory of Estate Assets
An inventory of estate property includes all assets within the decedent’s probate estate and may, like identifying creditors, require some detective work by the personal representative. The inventory should include all real estate, bank accounts, valuable personal property, and financial assets like stocks and bonds, along with less obvious assets such as intellectual property and promissory notes and other debts owed to the decedent. The representative should physically search the decedent’s residence to look for keys to safe deposit boxes, hidden cash, and records identifying other assets like life insurance.
An estate inventory should also include an appraisal of all estate assets and determination of the method of ownership. If an asset’s value isn’t easily determinable, the representative can hire an appraiser for the estate. Although a decedent’s percentage interest in jointly owned property may be part of the estate generally, assets owned in joint tenancy or as community property with a right of survivorship do not fall within the probate estate because they automatically transfer to the surviving owner upon the decedent’s death.
Once identified, existing bank accounts, death benefits payable to the estate, and repayment of debts owed to the decedent can be used to fund the estate’s bank account so that cash assets are consolidated and available for administrative expenses. This allows the representative to pay out any bills or costs of maintaining estate property, which must be carefully recorded. However, the personal representative should not begin paying out creditor claims yet. If estate assets end up being insufficient to satisfy all claims, the personal representative can be held personally liable for creditor claims paid in breach of the statutory order of priority.
The personal representative is responsible for filing the decedent’s final income tax and federal estate tax returns, if necessary. Any income tax refunds become an asset of the estate. California does not have a state-level inheritance or estate tax, but California residents are still liable for the federal estate tax if the estate is large enough.
After the executor has thoroughly searched for and cataloged all assets of the estate, the inventory with accompanying appraisal are filed with the probate court.
Handling Creditor Claims in a California Probate
In response to the notices provided by the personal representative, creditors file claims against the estate for any outstanding debts or other financial obligations claimed to be owed by the estate. A creditor claim is essentially a demand for payment and can arise from medical bills and funeral expenses, contractual debts, tort claims, outstanding judgments, unpaid assessments, taxes, and the like. Creditors file claims with the probate court and serve a copy on the personal representative.
When presented with a claim, the personal representative can accept the claim, reject it, or accept it in part. If a claim is rejected, the creditor has 90 days from the rejection to institute a suit to determine the claim’s validity.
Claims that are accepted are paid by the personal representative from the estate’s bank account in order of priority. Under California’s Probate Code, priority starts with administrative expenses, secured debts, funeral expenses, and bills for the decedent’s final illness; and continues through support allowances for surviving spouses and minor children, claims for unpaid wages, and general debts. If the estate has insufficient cash to pay all accepted claims, the representative will need to sell estate property to fund the payment or work out a settlement with the creditor. A careful estate plan will make sure that sufficient cash is on hand to avoid the necessity of selling property that may have sentimental value or may not sell for full value at an estate sale.
After creditor claims are paid or the personal representative determines that insufficient assets are available to satisfy all claims, the representative files with the court a petition to close the estate with a final accounting and request for approval of distributions.
Distribution of Estate Assets
Only after the estate is closed and distributions have been approved by the probate court can an executor or administrator begin formally distributing estate property to beneficiaries in accordance with the decedent’s will or California’s intestate succession laws. Of course, a personal representative cannot disburse to heirs any assets which are no longer in the estate, so property liquidated to pay creditor claims cannot be distributed.
A personal representative, ideally with the assistance of a probate attorney and upon consultation with heirs, will need to determine the best method of transferring property. For personal property, this usually just means delivering physical possession and any title to the item. For real estate, securities, and other financial assets, heirs may be best served by a direct transfer of the asset (e.g., deeding real property or transferring stock certificates directly to the heir), but sometimes it makes more sense for the estate to sell the asset and distribute the cash. Hopefully, the decedent’s estate plan will have already taken these considerations into account and developed an efficient and cost-effective plan.
California Probate Attorneys’ Fees
California’s Probate Code establishes a fee scale for measuring the compensation payable to a probate attorney for his or her services to an estate. Fees are calculated as a percentage of the estate’s value, with the percentage progressively decreasing as the estate increases in value. For example, the rate for the first $100,000 in gross estate value is 4.00%, and then the rate for the second $100,000 is 3.00%. The rate eventually tapers off to 0.5% for amounts between $10 million and $25 million, and anything over that is measured according to a “reasonable amount.”
The statutory fee scale is not mandatory, so attorneys can opt instead to charge a flat fee or bill by the hour for their services.
Strategies for Transferring Assets Outside of Probate
Under California law, not all assets that you might think of as property of the decedent become part of the estate and pass through probate. Non-estate assets are typically set up so that, upon the owner’s death, title automatically passes to another owner without the need for a California estate administration because the asset is not within the probate estate AND because it has already become the property of someone other than the decedent.
TOD (“transfer-on-death”) and POD (“payable-on-death”) designations are a particularly simple and effective means of avoiding probate. POD status is commonly used for bank accounts and CDs, whereas TOD is usually applied to securities. Either way, the designation is added during the owner’s life so that the heir automatically takes legal title at death. The primary difference between a jointly owned account and a POD account is that the beneficiary has no right to access a POD account until the original owner dies.
California is also among the around half of U.S. states that recognize TOD deeds for real estate. The principle is fundamentally the same as with a TOD security. An owner or owners of real property execute a TOD deed (also called a “beneficiary deed”) naming one or more eventual beneficiary, and, upon death, the real estate automatically transfers to the named beneficiary, thereby keeping it out of a decedent’s probate estate. TOD deeds differ from life estates in that the beneficiary does not receive a present interest in the property like the remainderman of a life estate. So, the current owner’s right to transfer the property during life is not impeded.
A beneficiary designation on an IRA, 401k, or other investment account works along the same lines. The beneficiary is named during life and inherits the account without the need of probate upon the account-holder’s death. For retirement accounts especially, a beneficiary designation can be very advantageous because it avoids the income tax hit that results when a tax-deferred retirement account becomes property of an estate.
Certain forms of joint ownership can also allow an asset to bypass probate. Real estate owned by two people as joint tenants becomes the exclusive property of the surviving owner upon the other owner’s death, with no need for probate. This feature of joint tenancy is referred to as a “right of survivorship,” which just means that a surviving owner automatically assumes a deceased owner’s share at death. Co-tenants, on the other hand, each own a given percentage of a property and can bequeath the interest to heirs through probate.
California law recognizes a special class of joint ownership only available for married couples called “community property with right of survivorship.” This form of ownership, which has only been available since 2001, allows married couples and registered domestic partners to enjoy the convenience and probate-avoidance benefit of joint tenancy with the tax advantages of community property.
California Revocable Living Trust
Revocable living trusts—which can be used in addition to or instead of a traditional will—have become a popular tool for transferring some or all assets outside of probate. Basically, if a trust was created and properly utilized, the California estate administration will be simplified because a probate will not be required.
After the death of the trust’s grantor, the trustee (or the “successor trustee” if the grantor acted as trustee during life) assumes a role similar to the executor of an estate, with the precise duties depending in large part on the specific instructions of the trust and whether the decedent left a will.
If a probate estate is required and opened, and if that estate has sufficient assets to pay creditors, the trust will operate more or less independently of the probate estate. The trustee makes distributions as instructed and eventually winds up the trust according to its terms, without any public disclosure of trust assets and distributions. If probate assets are insufficient, or if no estate is opened, creditors will be able to look to the trust for payment before trust assets can be distributed. When no separate estate is opened, the trustee has an obligation to provide notice to any potential creditors, who are then allowed to submit claims against assets of the trust.
Along with avoiding probate, the other big advantage of a living trust over a traditional will is that the trust allows the grantor (or “settlor”) of the trust to exercise additional control over the use of assets by beneficiaries. Where the testator of a will is essentially limited to deciding who receives what assets, a grantor can provide detailed instructions to the trustee about how and when trust assets should be distributed. Like an executor of a will, a trustee has a fiduciary duty to try in good faith to give effect to the grantor’s instructions.
For instance, a grantor might instruct the trustee to invest trust assets on behalf of a beneficiary until the beneficiary reaches age 25, and then distribute the proceeds. Or, the trust might provide for quarterly distributions to beneficiaries over a defined period of years, followed by a lump sum payment when the trust terminates. Or, the grantor might be instructed to use a portion of assets to fund a separate spendthrift trust that provides regular distributions over an extended period without running the risk of attachment by creditors or squandering by the beneficiary.
The flexibility and potential options for trusts are a huge benefit. Although the revocable living trusts commonly used in place of wills are not usually effective in mitigating estate taxes, certain types of irrevocable trusts are well-suited to that purpose. For larger and more complex estates in particular, wills and trusts are often used in tandem to accomplish objectives that neither instrument could achieve on its own.
The California estate administration process can seem overwhelming at first, especially to those who have never been through it. Although probate is undoubtedly detailed and time-consuming, with a little perseverance, diligence, and the guidance of an experienced estate-administration expert, California probate court becomes a manageable undertaking. If you need assistance in navigating probate or administering a trust, the advice and support of a knowledgeable California probate and trust administration attorney can be an invaluable asset.
Steve Gibbs, Esq.