Probate and How It Works

Probate involvement in the event of death means that the state becomes involved legally in dispersing the deceased’s assets in concert with the executor of the will until all the legal heirs have received their gift based on the wishes of the deceased. This includes the responsibility on the part of the estate to follow the proper tax returns to complete the process for probate to be satisfied with the completion of the process which can take as long as six months to three years depending on the amount of assets and unforeseen financial debts or objections to disbursement of gifts that may have to be addressed.

In the state of California, the probate proceedings occur in a Superior Courthouse in the county in which the deceased resided. The executor of the will as established by the deceased will file all the necessary paperwork with the court. They then have the task of having to inventory the assets as well as debts, which they can designate to a third party or they may opt to receive help with from trusted family or friends.

The cost of the use of probate lawyer in the probate process is determined by California law to be no more than four percent of the initial $100,000 that the estate is worth. Then, the fee is reduced by 1% for every $100,000 more until it reaches $800,000 where it stands at two percent fee. Then, it is reduced to 1% when that amount reaches $9 million and then to ½ percent at $15 million. Your lawyer can also ask the judge to waive the accounting of the assets of an estate and then the fees for the attorney are based on the overall inventory value with sales gains and losses factored in. Debts are never included in the fee. So, if the house of the deceased is appraised as a $3 million asset but still has a $1million mortgage, the property is still seen as a $3 million asset anyway. The actual probate court filing fees are no more than $400-$500 per county. An actual representative of the court called a probate referee who is selected by the State of California’s Controller, will also come out to a property and appraise it and set the fairest value on the property.

There are some advantages to going through probate court because if there are any objections on the part of family or friends to gift disbursement, the proceedings are mediated by a judge who is a neutral party. Also, the probate court will require any outstanding debts from creditors to be filed with them in order to be considered for review within four months or they will be legally dismissed against the deceased’s estate. Finally, it is a way of keeping track of what the executor of the will is doing at all times because the court requires that he or she file a report listing all of their activities on behalf of the estate. The only real disadvantage to probate court is that it is much more costly than the process for a living trust which has been set up in advance and only needs to be disbursed to the heirs. If you are unsure about whether you need to go through probate you can find more information on how to avoid probate.

Living Trusts

In California and most other states, living trusts are virtually the only way to avoid dealing with probate courts. In many cases, the deceased may not have enough assets for anything to even go to a probate court because it will not be required by California law to do so. A successor trustee who is usually a bank representative or financial advisor that is named by the deceased, will decide what is left over from a living trust that may need to be filed in probate court, but this is usually an unlikely task for them since anyone who has died and arranged a living trust in advance has taken all their assets into consideration beforehand.

Some of the advantages to having a living trust are that all assets within the trust are not subject to the probate court, the cost is lower, and it takes far less time to complete the process than with probate. The only real disadvantage to trust is transferring the assets which can be costly and time-consuming to fill out the proper paperwork if it is a complex estate.

Federal Estate Tax

This tax is federally mandated and it covers assets that are transferred to heirs after a person dies as well as while they were alive with the exception of a spouse. This includes living trusts, life insurance payouts, jointly owned property if a spouse is involved, and IRAs.

Approximately only 2 out of every 100 estates of a deceased person have to even deal with the federal estate tax. According to the Tax Policy Center, the small percent of estates that fall into this 2% category are roughly 40-50 small businesses a year and people that are considered the wealthiest individuals in the United States. These assets that are identified in this category are taxed at 40 percent.

If you fall into that very slim category of estates that have to deal with a federal estate tax, your share of the federal estate tax will be based on the appraisal of the estate’s value will be just 17 percent. A further advantage is that this tax only becomes effective after when the estate’s value goes beyond the exemption level of $5.49 million. Also, with a good estate lawyer in place who knows the law, they can help further by pointing out deductions that heirs can claim to further shield the estate from taxation under this law.

If the deceased party was legally married at the time of death, having a living trust in place would help deter federal estate taxes with the creation of what is referred to as an Exemption Trust. This type of trust protects specific assets that are named within it from going to a probate court and can include language that clarifies a reduction or elimination of federal estate taxes payments altogether for the surviving spouse which is called portability.

There are specific federal guidelines to be considered for portability under the Federal Tax Relief Act of 2010 and they are the following:

  • The deceased person and their significant other must be legally married at the time of death.
  • The deceased had to have already declared they wanted to use portability on an estate tax return before their death
  • Only the spouse of the deceased is eligible for this benefit

Other Considerations

In California, survivors are not subject to paying a state tax on anything they inherit or anything that has been gifted to them by the deceased party.

The federal gift tax must be considered in regards to the currency amount that may be given to survivors. A “gift” of up to only $14,000 can currently be given without having to pay any taxes on it. If a “gift” is from a married couple, that maximum amount rises to $28,000. There is also a lifetime gift of $5.49 million that will be deducted from the deceased exclusion amount.

What If There Isn’t a Will?

Quite often when there is an unexpected death, there is not a written will. This is referred to as dying “intestate.” California, like all other states, has a set of laws in place to address this issue when it arises which present a list of potential heirs to any assets called the laws of intestate succession.

With a multitude of different family circumstances to consider in dispersing assets, the laws are very specific in regards to a variety of family dynamics:

  • If the deceased did not have children, then the assets go to the deceased’s parents.
  • If the deceased’s parents are not alive, then the assets are identified as going to the “issue of the parents.”
  • If siblings are still alive, they will receive the assets.
  • If the siblings are deceased, the “issue” of the siblings (offspring) will receive the assets.
  • If the deceased was an only child, the assets go to the grandparents.

Community Property and Separate Property Disbursement in California

Community property can be generally defined as the items that were accumulated during the marriage and belong to both parties in that marriage. Sometimes, it is legally referred to as marital property. The property that is usually defined as community property is the following:

  • Interior and exterior furniture
  • Any property defined as a residence
  • Vehicles
  • Paintings
  • Stocks and bonds, investment interest
  • Wages of the deceased
  • Debt incurred by the deceased including mortgages

California is one of the few states that have laws that specifically designate how community property will be dispersed among the heirs based on their role within the family.

Separate property is defined as anything that the deceased acquired before the marriage, any gifts that were received during the marriage that was given only to the deceased, or anything the deceased bought with their own money, (and can be proven) while they were married. Specific items under the separate property are:

  • Personal bank accounts of only the deceased
  • Inherited items that were given solely to the deceased
  • Money won by the deceased in a personal injury case

There are also some gray areas that are present in the community and separate property distribution and that is defined as “quasi-community property”. These are items that initially only belonged to the deceased, but in the course of the marriage, became marital property based on some sharing of financial responsibility in the item or property. For the surviving spouse to claim this type of asset, they must usually show proof in a court of co-mingling of financial responsibility for the item.

The following is a list of heirs for community property and separate property based on a surviving spouse and children:

  • All community property goes to a surviving spouse who has proof of a legal union with the deceased. Once proof of marriage is established, the spouse will have to file with the state of California a spousal property petition so the state can recognize ownership of the property as solely belonging to them.
  • If the spouse is the only living relative, all the separate property will automatically go to them as well.
  • In the case of a living child, the spouse receives half of the separate property.
  • If there is no living child but the deceased’s parents are living, the spouse also only receives one-half of the separate property.
  • If there are multiple children that are alive, the spouse receives one-third of the separate property.

Identification of Unique Families

Although adopted children are legally identified by the name “adopted,” they are viewed under the law as equal to biological children of the deceased party in nearly every aspect of the estate process. So, in the case of no will, California sees biological and adopted children as being equal heirs.

There is also the consideration of the “second-parent adoptions.” This means that a couple who is not legally married has a child that one of the parties, (in this case the deceased party), at some point in the relationship legally adopted. This is important from the aspect of custody. The estate will specify that they recognize the second-part adoption and uphold it so the surviving parent can remain in legal charge of the child until they are of age.

Stepchildren and Other Non-Biological Family Members and Estates

Without legal documents showing some that adoption took place of a step-child by the deceased individual, stepchildren do not have any claims on assets or even any rights in general to an estate. Even in the case of legal adoption, their rights may still be limited. So, the deceased has to make it very clear in their will what a stepchild, will receive from their estate to avoid any objections from the biological children and other family members. This may include adding an amended document to the original will.

If there is a surviving spouse of the deceased and that individual marries again, the best way to safeguard the estate from a stepparent would be for the deceased to specify in their will that their biological and even step-children from the spouse are the primary beneficiaries of specific assets from their estate. This can include life insurance policies, pensions, and stocks. All of this procedure should be done through an estate attorney ahead of time with the deceased while they are still alive in conjunction with the spouse so they know the circumstances and there are not any disputes to the gifts to heirs later on.

Pre-Nuptial Agreements and Families

With California a widely popular state for prenuptial agreements, it is important to note that a prenup can clarify which personal assets will go to which heirs just as a will would. This includes post-nuptial agreements after a couple has legally wed. California recognized postnups while many other states do not. Often, a judge is involved in this type of agreement after someone dies because they are viewed as easier to documents to dispute than a living trust or another will.

Prenuptial agreements can also play a role in estate planning, as they let you designate personal assets for existing rather than future children. Postnuptial agreements (similar to prenups but drafted after a marriage ceremony) can also do this, but some states don’t recognize these types of agreements, and sometimes a judge must preside over disputes involving these documents which can be easily disputed by third parties.

Lesbian, Gay, Bisexual, and Transgender People

California upholds the IRS statute of 2013 that recognizes the equal rights of LGBT individuals to heterosexual married couples in creating and executing their wills and living trusts. This also means that LGBT couples can identify their property as community property assets and take full advantage of the surviving spouse benefits mentioned previously that refer to who will inherit these assets.