“Probate” is one of those words used by many and understood by few. Put simply, it is the method by which the State allows for the orderly transfer of assets and liabilities to the next generation after someone dies. Usually supervised by the Superior Court, a person is appointed to gather the assets, pay the legitimate debts (or contest them), and distribute the assets as provided by law or the Will after payment of relevant taxes.
Sound simple? It is not, for the interests of the State, of heirs, of creditors and of third parties all have to be taken into account and the process requires the person appointed to run the estate to go through various formalized steps required by law to achieve the close of probate.
The reader is advised to first read our article on Wills and Trusts, which gives a general description of the basic estate planning tools and an overview of probate. This article shall detail the probate procedure in more depth so that the reader understands the various steps required to achieve a successful probate.
Note that probate CAN be avoided by appropriate estate planning and in many instances our firm recommends taking those steps to save time, money and trouble. Certain family situations, however, make the use of the probate process either necessary or advisable.
The Basic Process
Probate is a legal process whereby a court validates the deceased person's will or determines that he or she died without a will. The court also appoints someone to handle the decedent's assets and pay the bills owed at death. That someone is referred to as an executor, administrator, or administrator with the will annexed, depending on the circumstances.
An additional purpose of probate is to see if anyone was owed money at the time of death so that creditor can come forward and make a claim to receive payment. There is a fixed period of time for creditors to come forward and demand payment.
Along with the payment of debts, the probate process is designed to see that taxes are paid. Income taxes for the personal income tax return up to the date of death must be paid. Income collected during probate requires the filing of a separate estate income tax return and the payment of tax. If the decedent owned over $12,060,000 (depending on year of death) of assets at the date of death a federal estate tax return is required and the tax due must be paid within nine months of the date of death.
Congress continues to alter the Estate Tax every five or ten years so be sure to update the above information.
Lastly, after all assets of the decedent are collected, assets are sold and taxes and debts are paid, then the executor or administrator must distribute the remaining assets in accordance with the decedent's will or the rules of intestate succession, if the decedent died without a will.
Assets Subject to Probate
While not all assets that the decedent owned are subject to probate, the following assets are usually subject to the probate process:
1. Assets in the deceased person's name alone.
2. One-half of each asset owned as community property in the decedent's name with his or her spouse.
3. The deceased person's portion or share of an asset where the asset is owned as tenants in common with other people.
4. Personal property assets, which are owned but are not registered as the personal property of the Decedent, such as furniture, jewelry, etc.
California law provides that a probate is not necessary if the total value at the time of death of the assets, which are subject to probate, does not exceed the sum of $166,250.00 There is a simplified procedure for the transfer of these assets.
The $166,250 figure does not include vehicles and certain other assets.
There is also a simplified community property set aside procedure if all the assets owned by the Decedent are community property with a surviving spouse.
Assets Not Subject to Probate
Certain Assets are not required to go through probate to vest in an heir or other person. Even though there may be a probate for a portion of assets owned, the following assets are not subject to the probate process:
1. Assets held in joint tenancy with another person or persons.
2. Assets held in a living trust.
3. Assets such as life insurance and IRA benefits, where a beneficiary is named.
4. Assets in a bank or savings and loan account in the deceased person's name as "trustee" for someone else.
5. Assets which can be registered in a person's name and which are "payable on death" (P.O.D.) or "transfer on death" (T.O.D.) to someone.
6. Assets passing to the surviving spouse. If the deceased person owned assets in his or her name alone but these assets are left by will or pass by intestate succession to the surviving spouse, no probate is necessary.
7. Assets registered by husband and wife as "community property with right of survivorship." As mentioned above, California has a simplified legal process referred to as a "spousal confirmation proceeding." Here, a petition is filed with the court, notice is given to certain parties, and if no one objects, the court approves the assets as going to the spouse.
This procedure can only be used for husband and wife. For example, Husband X has $400,000 of separate property stock in his name alone. He has a will, which leaves everything to his wife. His wife can go through this spousal confirmation proceeding. The advantage is that there is no fixed fee as there is for probate, and the process takes approximately 30-60 days instead of 9-12 months.
The Steps Involved in the Probate Process
When someone dies, the first question is whether there will be a probate proceeding?
If all of the assets are in a living trust or joint tenancy, then the answer will be no. If the deceased person has more than $166,250.00 of assets in his or her name alone and there is no surviving spouse or the assets were not left to the spouse, the answer will be yes.
If it is necessary to have probate, the second question is who will act?
If the decedent left a will, he or she named someone in the will as executor. That person or persons does not have to be a California or United States citizen or resident. A friend may serve, the person's three children may serve jointly, or a California bank or trust company may serve. No one has to serve if named.
The next question is will the person or persons agree to serve?
If there is no will or all the persons named refused or are unable to serve, then the nearest relative or relatives have the first right to serve or to nominate someone if they do not wish to serve. If there is no will, the person appointed by the court is called an administrator. Occasionally, someone will die with a will, but the will does not name an executor or the person named is deceased or will not serve, or possibly a bank is named and the bank declines because the estate is not large enough for the bank. The court then appoints the nearest relative who inherits under the will. That person is referred to as an administrator with the will annexed.
All of the above appointed persons have a fiduciary duty and perform the same duties once they get appointed even though their title varies depending upon the circumstances.
Appointment by Court
To start the probate process it is necessary to file a petition with the superior court in the county where the deceased person lived at the time of death. This petition is set for hearing approximately 30 days after it is filed with the court.
If there is an emergency (a home or asset is in danger or a heir needs help from the assets immediately, etc.) and it is necessary for someone to act within the 30-day period, it is possible to get someone appointed within 24 hours as a "special administrator." This person handles estate assets until the executor or administrator gets appointed. If the decedent was the only signer on a business bank account and salary and other bills have to be paid immediately, a special administrator can be appointed.
After the petition is filed, a notice of the court hearing must be published three times in a local newspaper. In addition, a notice of the court hearing must be mailed at least 15 days prior to the hearing to everyone named in the will, all of the deceased person's heirs at law (those people who would inherit if he or she died without a will), and any other alternate executors named in the will.
If the will had special wording at the end of it where the witnesses sign, then it may be "self-proving" and no additional statements are necessary. If the will is not self-proving then a statement must be obtained from one of the witnesses to the will.
If a witness cannot be located, then there are several alternative ways of proving the will. If the will is handwritten, anyone who is familiar with the decedent's handwriting can sign a statement proving the will.
If the will does not waive a surety bond, then the executor or administrator must post a surety bond. The surety bond is nothing more than an insurance policy which insures the estate if the executor or administrator does something improper or steals from the estate. The premium of approximately $200-800 is paid out of the estate assets.
At the court hearing if everything has been done correctly and there are no objections, the court will admit the will to probate and appoint the executor or administrator.
After the appointment the executor or administrator must file a special form with the court titled "letters testamentary" or "letters of administration." This is signed by the person, and he or she agrees to act as executor or administrator. Later, when taking legal action or transferring assets, other parties will want a certified copy of these "letters" showing that the person has the legal authority to act.
Assembling the Assets
After the appointment the executor or administrator must take possession of all of the decedent's assets subject to the probate process. Assets in joint tenancy, assets in a living trust or assets subject to a beneficiary designation are not part of the probate and are not collected. The executor or administrator needs to change title to the assets and to put these assets in his or her name as executor or administrator. Mutual funds, stocks and bonds, brokerage accounts, bank accounts, real property, vehicles and other assets should be changed over.
After collecting all of the assets, it is necessary to prepare an inventory listing these assets. At the time that the executor or administrator was appointed the court also appointed a "California Probate Referee." This individual has the responsibility of valuing all of the non-cash items with the fair market value as of the date of death. The referee receives a fee of $1 per $1,000 for the value of the assets appraised. The value is the gross value excluding any loans or liens on the assets.
If the home is valued at $500,000, even though there is a $250,000 mortgage on this home, the referee values it at $500,000 and receives a $500 fee for this.
There are legal procedures for contesting the referee's value if someone does not believe it to be accurate. The appraisal of all of the assets is supposed to be filed with the court within four months of the executor or administrator's appointment.
Payment of Liabilities and Debts
As soon as the executor or administrator is appointed by the court and obtains money, bills can be paid. Funeral, utility, credit card and other bills can be paid without any special legal formality.
Anyone can be required to submit a creditor's claim in the estate. This is a special court form that must be completed by the creditor and approved by the executor or administrator. If the executor or administrator wants this form submitted by a creditor then a notice must be sent to the creditor. Claims normally must be submitted within four months of the executor or administrator's appointment. There is an exception if the creditor was not aware of the death. If that occurs, the creditor can petition the court after the four-month period for submitting a claim. The petition cannot be filed later than one year after the executor or administrator's appointment.
If the executor or administrator rejects a creditor’s claim, the creditor must file a lawsuit within three months of the rejection or lose all right to later sue. Before a lawsuit can be filed, the creditor must file a claim. This claim is true for any type of claim, including ones based on tort actions. If Mr. X is in an automobile accident and dies and other parties wish to sue his estate, they must file a creditor's claim within the required period before they can file a lawsuit.
Most estates do not involve any contested creditor's claims. The executor or administrator pays the outstanding bills and no one objects.
Sale of Estate Assets
It may be necessary or practical to sell some or all of the estate assets. Assets may have to be sold to pay taxes, fees and debts. Or the home may be vacant and the children do not wish to inherit it, so it is sold during probate.
There are two methods of selling assets in a probate proceeding, which the executor or administrator may chose.
First, court approval may be obtained before any asset is sold. If the stocks or bonds are sold, a court order is necessary before selling them. If real estate is sold, a court hearing must be held and anyone may offer a higher price for the property in court and take it away from the original buyer.
Second, the executor or administrator may sell assets under a provision of California law referred to as the "Independent Administration of Estates Act." Under this act the executor or administrator may sell any asset. The only requirement is to give written notice to any beneficiary who is affected by the sale at least 15 days before the proposed date of sale. If no one objects, then the sale may proceed. If someone objects, then the court must be petitioned for approval the same as alternative number one, above.
After appointment, the executor or administrator usually prepares a budget with an estimate of the federal estate tax, fees for the executor and attorney, administrative costs, cash bequests under the will, and debts or claims. If there is insufficient cash available, then a decision must be made as to what assets to sell. If there is sufficient cash available, then a decision must be made as to whether any assets such as the home should be sold. Once the decision is made to sell assets, the executor or administrator should proceed with the sale. It makes little sense to allow the home to remain vacant for nine months and then put it on the market for sale. If the home is going to be sold, there seems little reason why it should not be marketed within 30 days of the appointment.
Payment of Taxes
The executor or administrator is liable to see all of the taxes due the federal government and the State of California are paid. While the executor is not normally personally liable, this liability does extend to the assets that are in probate.
If the executor or administrator distributes assets and the Internal Revenue Service or California Franchise Tax Board assesses a deficiency, the executor is liable for the value of the assets distributed.
Tax returns must be filed and prepared and while it can be the executor or administrator who does so if the person is skilled enough to do so, more commonly it may be the attorney or the tax preparer, enrolled agent or certified public accountant who handled the decedent's tax matters prior to death. Whoever it is must be skilled enough to prepare and file all of the required tax returns.
Federal Estate Tax
If a person dies with over $12,060,000.00 in assets, depending upon the year of death, an estate tax return must be filed within nine months of the decedent's death. An extension to file this return may be obtained for up to an additional six months.
NOTE THE AMOUNT OF EXEMPT ASSETS IN THE ESTATE AND AMOUNT OF ESTATE TAX DUE IS CHANGING ANNUALLY AND ADVICE SHOULD BE OBTAINED AS TO THE CURRENT AMOUNT DUE AND THE LATEST STATE OF THE LAW.
Any amounts left to qualified charities and any amounts left to the decedent's spouse (if a United States citizen) are exempt. (See our article on QDOT TRUSTS.) All debts that the decedent owed at the time of death such as funeral costs, legal fees, debts, etc. are also deducted. If the net estate is over $12,060,000 (altered annually so check the year of death for actual rate), after deducting the debts, a tax of 40% or more (depending on year of death) is due and payable.
If the return is not filed within the required time limit or if the tax due is not paid there may be substantial penalties and interest. Because the value of the assets is the value as of the date of death, the person who is preparing the tax needs to immediately start gathering information as soon as possible after the decedent's death.
Prior to Death Income Tax Returns
Even when someone dies, an income tax return has to be filed for the year of death. Assume Mrs. X dies on July 21st. An income tax return will be required from the first of the year until the date of death-January 1st-July 21st. The return is due by April 15th of the following year. Only the income received and any deductions paid through the date of death will be reported on the return. Income such as dividends and interest received after the date of death will not be reported on the return but will be picked up on the estate income tax return, or by the surviving joint tenant if the asset was in joint tenancy.
Any medical deductions on the decedent's part paid within one year of the date of death may be deducted on the final return. All other deductions must have been paid before death to be allowable. Estimated income taxes paid for the year of death should be reviewed. Depending upon the date of death, it may not be necessary to continue to make estimated payments after death.
The decedent's income tax returns for the four years prior to death should be retained, and the return for the year prior to death should be carefully reviewed to be sure all items of income and deductions are picked up. If the decedent died after January 1st but before April 15th or even later, a return may still be due for the prior year. With extensions, it is possible to file your income tax return as late as October 15th for the prior year. If the return has not yet been filed, an extension can be requested and will usually be granted.
Fiduciary Income Tax Returns
Income that comes in after the date of death is not reported on the decedent's personal income tax return. If the interest, dividends or other income are paid to the estate, they must be reported on the fiduciary or estate income tax return. A separate tax identification number is obtained for the estate and used in lieu of the decedent's social security number.
A separate income tax return, called a fiduciary tax return, is filed annually for the estate. This form lists the taxable income such as dividends, interest, capital gains and net rents. The fiduciary return also takes off the allowable deductions such as mortgage interest, legal and executor's fees, taxes, and a few other deductions. The tax return does not have to filed on a calendar year basis, as of December 31st. It can be filed on a fiscal year basis at the end of any calendar month. Once a fiscal year is picked, the return must be filed within 3-1/2 months of the end of the tax year.
At the end of the tax year if the estate has not been closed and distributed, the tax is then paid on the net income. That income is later distributed to the beneficiaries of the estate without additional tax. If the estate has been distributed during the tax year, the tax is not paid on the net income, but instead each beneficiary must list his or her proportionate share of the taxable income on his or her personal tax return. Fiduciary tax returns are required until the estate is closed and distributed. If the estate is open for more than two tax years, estimated fiduciary taxes must be paid each year.
Other taxes may also be due. Real estate taxes are due in California by December 10th and April 10th. Sales tax may be due if there is a business selling some product. If the decedent made a gift of over $15,000 to someone during the year of death (2022 or later), a gift tax return may be due. This tax can alter so check the lastest amount for the year of the gift. If there is real property in another state or country, it may be necessary to file a separate income tax return for the income in that state or country.
Liability for Taxes
As previously mentioned, the executor is liable for taxes if assets are distributed and additional taxes are later discovered to be due. Because of this, the executor or administrator will frequently request to be allowed to hold back some estate funds for a period of time as a reserve if additional taxes are due. This reserve may be kept for two to three years and then distributed without additional court order to the estate beneficiaries. The period of liability for taxes is normally three years for the federal government. This period is from the due date of the return or the filing date if it is later. The period of liability for the State of California is four years.
Thus, the liability for a 2004 return filed on or before April 15, 2005, will expire on April 15, 2008 for the Internal Revenue Service, and on April 15, 2009 for the California Franchise Tax Board. There are longer periods of liability if the taxes are underpaid by 25% or more. The period of liability never runs out if a tax return is not filed or if there is fraud involved.
Concluding the Estate
After the estate assets have been inventoried, the period for filing creditor's claims has expired and all claims paid or resolved, the necessary assets sold, and all required tax returns filed and taxes due paid, then the estate can be distributed.
To conclude the estate it is necessary to petition the court and to obtain a court order to make the distribution. The executor must either file an elaborate final accounting listing all receipts and disbursements or obtain a waiver of the accounting from all of the estate beneficiaries. After the accounting is prepared or waived, a petition is drafted which is a summary of the estate and the actions taken. This petition lists the assets currently on hand and the proposed distribution of these assets. The fee that the executor or administrator and the attorney receive is computed and shown.
If everything is in order and there are no objections, the court will issue an order concluding the estate, ordering the fees paid, and the assets distributed. Once the court order is obtained, checks may be written and assets reregistered in the names of the estate beneficiaries. After the assets are distributed a receipt for these assets is obtained from each estate beneficiary and filed with the court.
As previously stated, if the estate is relatively simple and no federal estate tax is due, it can be concluded in 6-9 months. If there is an estate tax due, the period will likely increase to 12-15 months. The estate should not be in probate for more than 18 months unless there is litigation or significant problems that prevent distribution.
The task of the executor is not minor. Simply preparing the inventory and the accounting takes tens if not hundreds of hours, not to mention the taxes, possibly selling assets and dealing with questions and issues presented by heirs. Fees for both the executor and attorney are set by state law (and are identical) and if certain events occur, such as selling major assets or litigation, both or either may petition for extraordinary fees. The Court must approve all fees paid and interested parties may object.
It has been our experience that while many executors at first indicate that they will not charge fees, once they fully understand the significant work required, not to mention the potential liability, that they ultimately conclude that the fees are appropriate. Such fees can be waived, of course, and if the executor is also an heir, it makes sense to waive them to save income taxes.
The first step normally taken by the executor nominated is to seek legal and tax advice from professionals and normally it is the attorney who ends up handling almost all the details and drafting required for the Probate. Nevertheless, the executor retains a full fiduciary duty and must carefully oversee the work of both the attorney and the accountant hired.
The reader is advised to review the other articles on this site for various other aspects of Estate Planning and Trusts.