Often, one of the most important estate planning issues for a client is how their property will be distributed after they die.
What is Probate?
Probate is a court proceeding which clears title to property passing from the decedent (the person who died) to those persons named in the decedent’s will (the beneficiaries). Probate carries out the direction provided in the will for property that does not pass outside of probate.
Why Do I Want to Avoid Probate?
Probate is often described as something to avoid in California without any further explanation of the reasons why. In California, the probate process is cumbersome, time-consuming, and expensive. Several of these disadvantages to probate are discussed in more detail below.
1. Costly and Expensive
First, probate fees are based on the gross value of property in the estate at the time of the decedent’s death. None of the decedent’s debts are taken into account. Probate fees are determined and awarded by statutory law in California. Further, the fee, once calculated, may be paid twice—once to the attorney and then again to the executor or administrator (unless the executor or administrator declines to take a fee).
In addition, any supplementary actions in a probate, such as litigation or selling real property produce “extraordinary” (i.e., additional) fees for the attorney and the executor. Fees can be significant and unnecessary, and are on top of court fees and expenses that may be several thousand dollars.
As mentioned above, the California probate statutory fees allow an executor and the attorney to collect a percentage of the gross value of the probated estate as his or her fee. While the executor fees can be waived, the attorney fees are likely unavoidable. The table below illustrates how the fees are calculated and provides examples of executor and attorney fees.
For example, if a mother owned a house with title taken in her name in California with a fair market value of $1,500,000 with a mortgage of $800,000 at the time of her death, the probate fees will be calculated based upon the entire $1.5 million property value, despite the estate only having $700,000 in equity.
In order to transfer the real property to her children at death in accordance with their mother’s will, the children will need to go through the probate process to change the title and take ownership of the home. Assuming the real property is the only property in the mother’s estate, a $1.5 million estate will result in a minimum probate fee of $28,000 and could be as high as $56,000 if the executor elects to take a fee.
To complete the transfer, either the children or the mother’s estate would need to come up with a considerable amount of money. In addition, there may be extraordinary fees due for selling the house if the children are forced to sell the real property to pay for the fees associated with the probate of their mother’s estate or if the children prefer to receive proceeds from the home rather than the real property.
In contrast, if the mother had established a revocable trust for the purposes of holding the title to the property, her estate could have avoided the probate process, and the fees associated with probate.
The average length of a probate proceeding in California is between 9 and 24 months. During this time, the beneficiaries of the estate do not have legal title to the assets they ultimately are to inherit, and simple tasks involving property become unnecessarily cumbersome. For instance, refinancing a loan or selling the property may require court approval, resulting in additional delays (and additional costs).
3. Privacy Issues
Since all documents relating to the transfer of property must be filed with the court, the documents are available for public review. In most circumstances, the values of the deceased person’s assets are subject to public disclosure through asset inventories required to be filed with the court, as well as the deceased person’s beneficiaries and any conditions on their receipt of the assets that are set out in the will.
4. Ancillary Probate
An ancillary probate is a probate proceeding in another state in addition to the probate proceeding in the state where the decedent lived. Real estate held by an individual at death is governed by the probate laws of where the real property is located. Therefore, if a California resident dies owning real estate titled in his individual name in Oklahoma, an additional probate will be needed in Oklahoma to transfer the real property upon death, along with any probate proceedings needed in California.
Conversely, an Oklahoma resident who owns a vacation home in California will need to begin probate proceedings upon his death to transfer the California real property to his children in addition to any probate needed in Oklahoma. Ancillary probates may increase the costs and time exponentially as two (or more) separate probates are required.
What Are Ways to Avoid Probate?
There are various forms of holding title to property which will determine whether an asset is to be “probated.”
1. Revocable Living Trust
Creating and funding an inter vivos revocable living trust is one way to avoid probate. A revocable living trust provides for private administration, outside of the courts, and there are no required statutory fees, which generally allows for the administration of the trust to be more time- and cost-efficient than probate. However, in order for a revocable living trust to be effective in avoiding probate, the assets must be retitled in the name of the trust before the death of the settlor.
In addition to avoiding probate, a revocable living trust generally sets forth a plan for the management of the settlor’s assets upon both incapacity and death. A revocable living trust may often be the most important part of an estate plan.
2. Assets Not Subject to Probate
Certain types of assets are transferred immediately upon death and are not subject to probate.
The titling of assets may cause an asset to be a non-probate asset. Two common forms of joint ownership that avoid probate are joint tenancy and community property with right of survivorship. When a person holds an asset in joint tenancy, upon the death of any co-owner, his or her interest passes to the surviving co-owners and ultimately to the last of them to survive.
Similarly, community property with right of survivorship is a form of community property which passes automatically to the surviving spouse. However, titling property as joint tenancy or community property with rights of survivorship does not pass according to the decedent’s will or revocable living trust and, therefore, it should rarely be used if with estates with significant assets, as passing outside of the primary estate plan may create adverse tax or other planning consequences.
A beneficiary designation is another method is which property passes from one party to another without the needs for probate. Retirement accounts, annuity contracts, or life insurance pass to directly to the named beneficiary (or beneficiaries) of the assets upon the death of the owner without the need for probate. However, these assets may be subject to probate if no beneficiary is named and, therefore, the assets become payable to the estate of the owner.
Are you a California resident in need of estate planning guidance? Reach out to our team today to discuss your situation and explore how we may be able to help.
Mary Louden, LLM is the director of estate planning at Brighton Jones.
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