Everything you always wanted to know about
THE LAWS OF ESTATES & PROBATES IN THE STATE OF CALIFORNIA
by Robert C Borris Jr
To die without a will is to die "intestate". Surprising to many people who learn of them, the laws of the State of California generally assure the passing of property to the "natural objects of our bounty", i.e., our spouses, children, etc. Property does not "escheat", or go to the government in the event one dies without a will or without a joint tenant. Escheat only occurs where there is no Will or other testamentary device and simply no ascertainable heirs at all.
The laws of intestate succession are somewhat lengthy (you can imagine the almost infinite number of combinations), and are not recited here in their entirety. The adventurous reader can discover them at Probate Code §§ 6401, 6402, and 6402.5. The following more common situations are hereinafter set forth:
For single persons dying without a will (“intestate”), property passes to the children, or if none, then to the parent or parents equally. If there are no surviving children ("issue"), or parent, then to the brothers and sisters of the decedent; if there are no such brothers and sisters, parent, or children, then to any surviving grandparents. For example, if a widow dies with two living children and one deceased child who has two children (grandchildren), then each of the two living children of the widow receive 1/3 of the estate, while the two children of the deceased child of the widow each receive 1/6.
For married persons, one must differentiate between the 'character' of the property involved, i.e., community property or separate property. Community property is all property received during marriage (not prior to marriage or after separation), other than property received by gift or inheritance. If community property, then the decedent's 1/2 will always pass 100% to the surviving spouse. If separate property, then 1/2 of the decedent's estate goes to the surviving spouse and 1/2 to their only child, or, if more than one child, then 1/3 to the surviving spouse and 2/3 in equal shares to the children. The entire separate property estate of the deceased spouse will only go to the surviving spouse when the decedent dies leaving no children, parents, brothers, sisters, nephews or nieces. Estate taxes are not necessarily affected by the existence or absence of a will, although smart tax planning in wills through the use of trusts can indeed avoid death taxes that an estate with a simple will or without a will would otherwise incur. Finally, probate is not necessarily a function of testate vs. intestate succession, as in general the same rules apply. Devices such as joint tenancy, lifetime giving, “pay on death to” accounts, and living trusts are methods of avoiding probate, but must be used with care and discretion. These are discussed later in this article.
WHY HAVE A WILL?
Assuming that the law of intestate succession does for most of us what we would otherwise do with a will, then why have a will?
The use of a will obviously gives one the ability to "customize" the scheme of descent/passing of assets and property in his or her estate. Some examples:
- One may leave particular items of property to certain persons, such as jewelry, heirlooms, etc.
- One may also designate guardians for his or her minor children as well as the executor who will distribute the estate.
- One may create trusts for certain beneficiaries who are deemed to be incapable of handling assets themselves, such as children, developmentally disabled persons, etc. (“Special Needs Trusts”)
- Finally, one may intentionally disinherit those persons who might otherwise receive part of the estate under the laws of intestate succession. Contrary to popular belief, surviving spouses or children can be disinherited by a decedent, so long as there is an express provision in the will doing so; the mere lack of mention in the will of the name of a spouse or children entitles them to their intestate share by reason of the so-called "pretermitted heir statute" California Probate Code Sections 21620-21623.
- PETS- While the law does not permit the creation of a trust for an animal, it is possible to have funds set aside for a pet in a "memorial" which can be articulated in the Will.
AVOIDANCE OF PROBATE
Probate is a Superior Court proceeding designed to
- monitor the distribution of estate assets in order to assure the same are given to those lawfully entitled;
- protect the interests of creditors of the estate; and
- insure that death and other taxes of the decedent are paid.
Probate proceedings are relatively lengthy, and in no event less than six (6) months in duration. Subject to various exceptions having to do with the relationship of the beneficiary to the decedent, Sections 13100 et sequitur of the California Probate Code provides a "Summary Administration" (non-probate) procedure for estates of $160,000.001 or less following a 40 day waiting period from the date of death. Also exempted from probate are death transfers between spouses which can be administered through relatively simple proceedings referred to as the "Spousal Property Petition" Family Code, § 297.5. Probate Code, § 13650
It is relatively simple procedure to avoid Probate with institutional accounts, such as bank accounts, investment portfolio accounts, etc., by designating a beneficiary to whom the asset will pass. Such beneficiary devices utilized by banks, etc., are referred to as "Totten Trusts". They are commonly known as “pay on death” (POD) devices.
There are, however, various pitfalls to such practices. For example, transferring real estate into joint tenancy, in non-spousal or non-child (of the donor) transfers can result in a reassessment of property valuation for property tax purposes, increasing property tax. This can be disastrous where, as now, real estate values have skyrocketed. Furthermore, such a transfer, while perhaps intended by the grantor to be a "will substitute" gives all outward appearances of being a present gift, and may trigger gift taxes. Most importantly, transfer of greatly-appreciated and/or tax-depreciated real estate imputes (gives, or transfers to) the new joint tenant his transferor's low basis (or deemed acquisition cost, what you paid for it) in the property under the “carryover basis” tax rule. Thus, the grantee may have to incur substantial capital gains taxes upon sale of the property. This could have been avoided had the asset not been deeded to the grantee during
1 This amount always changes and therefore should be researched each time it becomes of issue
the grantor's lifetime, but rather given after his death by intestate succession, will, or trust. In this fashion, the grantee will receive a "stepped-up" basis Internal Revenue Code § 2014 equal to the fair market value of the property at the date of the grantor’s death. Hence, an immediate sale of the property results in no capital gains tax.
AVOIDING PROBATE BY CREATING A LIVING TRUST:
A Living Trust (sometimes called an Intervivos Trust) is created by the Trustor (the creator of the Trust) during his lifetime, contrasted with a testamentary trust, which is created by reason of the Trustor’s death. Such testamentary trusts are found in wills.
The Living Trust is created by the client executing a document prepared by his attorney referred to as a "declaration of trust" which designates certain assets to be delivered to the Living Trust (we say that the Trust is "funded" with these assets). The assets are delivered to the Trust by transferring title to those assets to the Trust. For example, title to the home owned by Jack Jones would be conveyed by Jack to himself as "Jack Jones, Trustee of the 1987 Living Trust of Jack Jones". The client would normally be the Trustor of the Trust, the Trustee (or "manager") of the Trust, as well as the Beneficiary of the Trust.
The effect of transferring assets to the Trust is the avoidance of probate upon the assets at the time of death of the surviving spouse, upon the simultaneous death of both spouses, or upon the death of an unmarried person. This is especially beneficial where an estate contains any real estate or securities, as these types of assets tend to have a "slowing" effect upon probate proceedings and run up the bill on attorneys' and executors' fees.
No estate taxes are saved by the simple Living Trust although devices can be incorporated into the Trust to effectuate this. Conversely, no gift tax, property taxes, documentary transfer taxes or other assessments are incurred or increased in transferring assets to the trust. Sale, gifting, or refinancing of the assets is not interfered with in any way. The client may deal with these assets in any manner he chooses during his lifetime. The probate savings are substantial- note that the Probate Code provides for substantial statutory commissions for attorneys handling the Probate as well as the Executor or Administrator for the estate, who gets a matching commission as follows:
- 4% on the first $100,000 of estate;
- 3% on the next $100,000 of estate;
- 2% on the next $800,000 of estate;
- 1% on the next $9,000,000 of estate;
- 5% on the next $15,000,000 of estate; and a “reasonable amount” on the next $25,000,000 or more approved by the Probate Court
Note that the commission is calculated upon the basis of the gross (not net) value of the estate; mortgage obligations, loans, etc., are not subtracted from the gross estate in determining the amount of tax to be assessed. One more note- all probate assets, excepting bank accounts or other cash assets, must be appraised by a California Inheritance Tax Referee, at a fee of .1% of the gross assets appraised. A client of mine once paid some $6,000 in order to have IBM shares appraised (for those of you who are not stock traders, you can find such information easily online, or in any major newspaper in a matter of minutes). Notwithstanding the fact that there is no longer any California Inheritance Tax, the Probate Referee appraisal requirement remains. Its utility is questionable except to establish statutory Probate commissions. The Internal Revenue Service does not necessarily adopt the Probate Referee’s appraisal of value for estate or other tax purposes.
The Living Trust is usually "revocable", that is, the creator may "undo" it at any time without obtaining permission from anyone.
- A Living Trust must be funded. Property is ordinarily subject to a living trust only if the settlor has actually transferred the property to the trust. If the settlor is also the trustee of the trust, this transfer would merely be from the settlor, as an individual, to the settlor, acting as trustee of the trust. However, the transfer is essential. If property has not been transferred to a trust, it is not usually subject to the trust, and after the settlor's death it will constitute a part of the settlor's probate estate and have to be probated. However, property may be made subject to a trust without a transfer if the settlor is the owner of the property and the settlor declares that he or she is holding it subject to a specified trust. This declaration in itself will be sufficient to subject the property to the trust (and remove it from the probate estate) without any subsequent transfer, provided the declaration is specific enough to identify the property and the trust to which it is to be subject. In one case, for example, the settlor executed a declaration of trust by terms of which he purported to create a living trust. The settlor was named in the declaration as the trustee. A schedule of property (referred as"Schedule A'') was attached to the declaration. The schedule included real property described by its street address. The settlor never formally transferred this property to the trust by deed. Notwithstanding this, however, the court held that the language of the declaration and the description of the property in the attached schedule were sufficient in and of themselves to make the property subject to the trust and to remove it from the settlor's probate estate Estate of Heggstad (1993) 16 Cal. App. 4th 943, 950, 20 Cal. Rptr. 2d 433, now codified in Probate Code Section 17200. When the property has not been transferred to the Trust upon creation of the Trust (this is done with a Trust Transfer Deed), then consistent with Heggstad the beneficiaries or the Trustees may bring a Motion to Confirm Trust Asset in Probate Court and get it into the Trust notwithstanding the fact that the Trustor (the person who created the Trust) is now deceased. This is not a “probate” of the estate, however, and is relatively brief and simple.
- Transfer of Assets to Beneficiary The trustee will be responsible for transfer of trust property to a beneficiary in accordance with the provisions of the trust instrument upon the death of the trustor.
- Estate Tax Property placed in a revocable trust is includable in the decedent's gross estate for federal estate tax purposes. The exemption for the Federal Estate tax, however, now stands at $12,920,0002. This changes almost yearly, so consult legal research resources for updates. Estate Taxes are discussed later herein (infra).
LIFE INSURANCE PROCEEDS
The proceeds of life insurance policies payable on the death of the insured are a common source of funds for the survivors of a decedent. The policy may have been owned by the decedent or by a survivor who was dependent on the decedent or for whose support the survivor is legally obligated. The proceeds of the policy may be payable to the decedent's estate or to an individual or entity designated as the beneficiary. If the policy is payable to the estate, the
2 Effective January 1, 2023, the federal gift/estate tax exemption and Generation Skipping Tax exemptions increased to $12,920,000 (an $860,000 increase). The federal annual gift tax. exclusion amount also increased from $16,000 to $17,000. This is the amount of money you can give to anyone without having it reducing your lifetime federal gift/estate tax exemption (supra)
proceeds are an asset of the estate, and subject to Probate administration. If the policy is payable to a named individual or entity other than the estate, its proceeds do not pass through the insured's estate, are not includable in the estate. Life insurance proceeds are generally not subject to estate tax and are not includable in the estate for probate purposes (statutory fees).
SPOUSAL BYPASS TRUSTS
A common concern with many clients who have children from a previous marriage and who marry again is how to deal with the ultimate distribution of their estate upon their death and/or their new spouses. The situation is a very delicate one, and needs to be handled gingerly with both the politics of the family as well as the legal and logistical aspects in mind.
For example, Bill and Evelyn are married and Bill has three children of a prior marriage; Evelyn has one. Bill wants to see to it that his children receive his half of the estate some day and Evelyn wants her child to receive her half of the estate. Yet, each expects to receive from the other his/her share should the other predecease. The problem with such an arrangement is that once one spouse dies and the estate passes to the survivor, the survivor is free to change his/her Will or Trust and completely exclude the predeceased spouse's children (See, however, Estate of Powell (2000) 83 Cal. App. 4th 1434 which may prevent this). Yet, if the first spouse to die leaves his/her estate to his/her children at the time of his/her death, the surviving spouse may be placed in hardship.
A bypass trust (whether incorporated into a Will or Living Trust) obviates this problem. Upon the death of the first spouse, that spouse's half of the community property and any separate property pass to the surviving spouse, albeit in trust as opposed to outright. The trustee of such a trust may be the surviving spouse as well as another person, preferably someone with whom the spouse can get along. Access to such a trust could for example be limited to (1) net income, distributed often, (2) an annual "5 + 5" power (i.e., a withdrawal from the average principal balance of the trust each year the greater of 5% or $5,0003), and (3) a "necessaries" invasion of principal clause (for such things as medical or basic maintenance expenses). Upon the death of the surviving spouse, the distribution of this bypass trust is controlled by the Will or Living Trust provisions of the first spouse to die, and assures that his/her estate will be distributed to children.
FEDERAL ESTATE TAXES
As aforesaid, the lifetime Federal Estate/Gift Tax exemption stands now at $12,920.00. This is the amount of your estate you may leave at your death which is not subject to estate tax. Beyond this amount the Estate Tax can be quite expensive and a real problem if the main asset in the estate is a parcel of real property, say at 300 acre ranch in Livermore, California. The heirs will have to sell the property in order to pay the tax if there aren’t other assets in the estate to pay the tax bill.
There is also the Federal Gift Tax. You have now, as aforesaid, a $12,920,000 life time Gift Tax Exemption. When you make lifetime gifts, there is a $17,000.00 Gift Tax Exclusion per donee (the person who receives the gift; the person who “gives” is a “donor”). This means there is no tax. However, if the gift exceeds the exclusion you must file IRS form 709 and report the gift to the IRS. To the extent your gift exceeds $17,900.00 your lifetime exemption will be reduced by this
3. This is the so-called “5 by 5 Power”, a clause in a trust we use in Estate Tax planning that lets the beneficiary make withdrawals from the trust on a yearly basis. The beneficiary can cash out $5,000 or 5% of the trust's fair assets market value each year, whichever is a higher amount.
There are numerous methods for very large estates ($12,920,00 +) to avoid estate taxes, such as “super trusts”, “uni trusts”, “insurance trusts”, offshore trusts (watch out, however), and the like. these are unnecessary for most people unless they own tens of million of estate assets.
The foregoing is an extremely brief synopsis of estate planning and probates. This area of law, like bankruptcy, can be and is extremely complex.