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California's Probate Process
Probate's Purposes
Assets Involved with Probate
Assets Excluded from Probate
Selection of Executor, Administrator,
or Administrator with the Will Annexed
Court Appointments
Asset Collection
Bill and Debt Payment
Estate Asset Sale
Tax Payments
The Federal Estate Tax
Income Tax Returns - Prior to Death
The Fiduciary or Estate Income Tax Return
Additional Taxes
Tax Liability
The Estate's Conclusion
Probate's Purposes
Although it may seem that way at times, California's probate
laws were not developed to be an employment bill for the
legal profession. One thing that leads to that cynical
conclusion is the reluctance many people have to understanding
how the process works and how it can be avoided.
| Simply put, probate
is the legal process that results in a court validating
someone's will or determining that he or she died without
one. The court, as part of the probate, will appoint someone
to handle the bills of the deceased as well as his or
her assets. Depending on certain circumstances, that person
is called the executor, administrator, or administrator
with the will annexed. |
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Probate is also when creditors of the deceased can
appear before the court and make their claims for payment.
Under law, they have a fixed period of time to do so
and demand payment.
In addition to insuring the payments of those debts
presented by creditors, the probate process is also
used by the federal government to make sure taxes are
paid. Income taxes for the deceased must be paid for
his or her personal income tax return that covers the
period up to the date of death. If the estate earns
any income during the probate, a separate estate income
tax return is required, and taxes must be paid on the
income. If the estate of the person who died is over
the maximum exemption, which ranges from $1,500,000
to $3,500,000 depending on the year of death, a federal
estate tax return is due, and any taxes due must be
paid within nine months of the date of death.
Finally, following the collection of all the assets
owned by the person who died and any sale of them, taxes
and debts are paid before the executor or administrator
distributes the remaining assets as provided for in
the decedent's will or, if there is none, following
the rules of intestate succession.
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Assets Involved with Probate
Probate isn't involved or necessary for every asset that someone
owns when he or she dies, but it is regularly used for the following
assets:
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1. Assets that were held in only the deceased's name.
2. Half of each asset that was registered with his or
her spouse as community property.
3. That portion of any asset that belonged to the deceased
that he or she held as a registered tenant in common with
other people.
4. Any assets, including such things as jewelry, art,
furniture or the like, that are not registered. |
If the total value at the time of death of the deceased's assets
is less than $100,000, probate
is not necessary under California law, but that figure does
not include motor vehicles or certain other assets. The assets
that are not subject to probate receive a simplified procedure
for their transfer.
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Assets Excluded from Probate
Not everything is subject to probate. Although probate
may be required for a portion of someone's estate, the
following assets can avoid the probate process:
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1. Assets that are held in joint tenancy.
2. Assets that are held in a living
trust.
3. Assets where a beneficiary is named, such as IRA benefits
or life insurance policies.
4. Assets held in a bank or credit union where the deceased
was named as a trustee for another person.
5. Assets that were registered in the person's name that
are "payable on death" or "transfer on
death" to another person.
6. Assets registered by a married
couple as community property with the right of survivorship.
7. All assets that go to a surviving spouse, including
any assets the person who died owned separately in his
or her name but were left in the will or by intestate
succession to the surviving spouse. |
In California there is a simplified legal process called
a "spousal confirmation hearing" where a petition
is filed with the court. A notice is sent to certain
interested parties, and the court assigns the assets
to the surviving spouse unless there is an objection.
Only a husband and wife can take advantage of this process.
To illustrate this process, if John Smith has $200,000
of stock held separately from his wife, Ann, she can
go through this spousal confirmation process if he has
a will that leaves everything to her. Her advantages
are saving on the fixed fee required by probate as well
as savings in time. The spousal confirmation process
typically resolves the transfer within sixty to ninety
days instead of the nine to twelve months that probate
takes.
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Selection of Executor, Administrator, or Administrator
with the Will Annexed
One of the first questions following someone's death is
whether or not there will be a probate proceeding. If
all of his or her assets are held in a living trust or
in joint tenancy, no probate is required. If the person
had over $100,000 of assets and there is no surviving
spouse, then a probate hearing will be held.
If probate is required, an executor or administrator
for the deceased's assets must first be named. If there
is a will, someone was named to serve this role, and
the person need not be a California or United States
citizen or resident. Any legal person may fill this
position, so a California bank or trust company as well
as any friend or group of people, such as children serving
jointly, may act as executor. Although named as executor,
no one is forced to serve, and the person may decline
the job.
If no will is present, the nearest relative or relatives
have the first right to serve or select someone else
to perform the duties. While someone named in the will
is called the executor, anyone appointed by court is
called the administrator, though the duties are otherwise
identical.
Someone's will may fail to name an executor, or that
person may be deceased or refuses to serve. It is also
possible that a bank was named, but the bank declines
because the estate is too small. In any of these cases,
the court will appoint the nearest relative who is set
to inherit under the terms of the will, and that person
is referred to as an administrator with the will annexed.
Although the titles may differ, depending on how the
position was assigned, the responsibilities and duties
are the same.
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Court Appointments
Probate is begun by filing a petition in the superior
court in the county where the deceased person lived at
the time of his or her death. The petition sets a hearing
date of approximately thirty days following its filing.
A "special administrator" can be appointed
within a 24 hour period if an emergency necessitates
someone to act before the hearing date, and this person
will be able to handle the estate's assets. A "special
administrator" would be used if the decedent was
the only person permitted to sign for a business bank
account and salaries and other bills needed immediate
payment.
Once the petition is filed, a notice of the court hearing
has to be published three times in a local newspaper.
A notice of the hearing must be mailed to everyone named
in the will, too, as well as all the deceased's heirs
at law, who are those would stand to inherit if no will
existed. Alternate or named executors in the will must
also receive the hearing notice.
The will may contain special wording near the end where
the witnesses sign that makes the will "self-proving."
In that case, no additional statements are necessary.
If not, a statement proving the will as legitimate must
be obtained from one of the witnesses.
If a will requires proving and no witness can be located,
there are alternative ways of accomplishing this. If
the will is handwritten, someone familiar with the decedent's
handwriting can sign a statement verifying its origin.
Unless waived by the will, a surety bond must be posted
by the executor or administrator. This bond is simply
an insurance policy that insures the estate against
loss from theft or other improper activity by the executor
or administrator. The bond's premium, which typically
runs $200 $800, is typically paid from the estate.
If all the above steps have been taken and there are
no objections, when the hearing is held the court will
admit the will to probate and appoint the executor or
administrator. This person must then sign and file a
special form, a "letters testamentary" or
"letters of administration" with the court,
to signify that he or she agrees to act as administrator
or executor.
Certified copies of these letters, which cost $7 -
$10 each, will be required by other parties when the
estate's assets are later transferred or other legal
actions are taken, showing that the person has the legal
authority to perform the requested tasks.
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Asset Collection
The executor or administrator must take possession of
all the assets that are subject to the probate process
soon after being appointed. This collection will not include
assets held in joint tenancy, in a living trust, or those
subject to beneficiary designation since those are not
part of the probate process.
The title on the collected assets needs to be changed
to name the person assigned as administrator or executor
of the asset. Assets that need their title changed include
all stocks and bonds, brokerage accounts, mutual funds,
bank and credit union accounts, and physical assets
such as real property, motor vehicles, boats, and planes.
An inventory of the assets needs to be completed once
they are all collected. When the court appointed the
executor or administrator, a "California Probate
Referee" was also assigned, whose has the responsibility
of determining the fair-market value of all the estate's
non-cash assets as of the date of death. This referee
receives a fee of $1 for every $1,000 of gross value
for the assets appraised. Thus, for a home valued at
$300,000, this individual receives a $300 fee, regardless
of any mortgage amount. A legal procedure is in place
if someone contests the Referee's assessment, and the
appraisal of all the assets is due within four months
of the executor's or administrator's appointment.
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Bill and Debt Payment
Bills can be paid from the estate once the executor or
administrator is assigned by the court and obtains access
to the funds. The payment of utility, credit card, and
other bills can be paid without any special legal formality,
as can funeral expenses.
A special court form can be filed by anyone with a
claim on the deceased's estate, which is completed by
the creditor and approved by the executor or administrator.
A notice must be sent to the creditor by the administrator
or executor if the person filling that position wants
the special form submitted.
All claims have to be submitted within four months
of the appointment of the executor or administrator.
The only exception is when the creditor was unaware
of the death, and if that happens, then the creditor
can petition the court up to a year after the appointment
of the executor or administrator.
A creditor's claim may be rejected by the executor
or administrator. If this occurs, the creditor has three
months following the rejection before losing all rights
to sue. The lawsuit can only be filed if a claim was
earlier filed by the creditor.
If John Smith died as a result of an automobile accident,
for instance, any parties who wish to sue his estate
must file a creditor's claim within the four month period
before any lawsuit can be filed.
In most cases, there are no creditor claims on the
estate. Objections are infrequent when the administrator
or executor routinely pays the outstanding bills.
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Estate Asset Sale
For reasons of practicality or necessity, some or all
of the assets in the estate may have to be sold. Reasons
for this may include the payment of estate taxes or the
repayments of debts, or the asset may be a vacant home
the children do not wish to inherit. In these cases, or
any other, the assets are sold during the probate process.
The executor or administrator may select between one
of two ways to sell the assets. In the first instance,
court approval is obtained by the executor or administrator
before any asset is sold. Then, a court order is required
if stocks or bonds are sold, and a court hearing is
required before any real estate is sold. During that
hearing, anyone may offer a higher price for the property
and take it from the original buyer.
The executor or administrator may choose to sell assets
using the provisions of a California law referred to
as the "Independent Administration of Estates Act."
This Act permits the executor or administrator to sell
any asset as long as written notice is given fifteen
days before the proposed date of sale to any beneficiary
whose interest in the asset would be affected. If there
are no objections, the sale takes place, but if anyone
objects, then the court must be petitioned for approval
using the procedures listed for the first alternative.
The executor or administrator usually prepares a budget
after being appointed, and this budget includes an estimate
of federal estate taxes, any attorney or executor fees,
administrative costs, debts or claims on the estate,
and cash bequests specified by the will. If there isn't
enough cash in the estate to cover these expenses, the
assets to sell must be decided. If sufficient cash is
available, then a decision has to be made if any assets
such as a home should be sold anyway.
After a decision is reached on which assets, if any,
should be sold, the executor or administrator can proceed
with the sale. If a home is going to be put on the market
for sale, it often makes more sense to market it within
thirty days of the appointment rather than to let it
remain vacant for nine months.
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Tax Payments
It's the responsibility of the executor or administrator to
see that all taxes due to the federal government and the State
of California are paid. While he or she is not usually personally
liable, the assets under probate are. If assets are distributed,
however, and either the Internal
Revenue Service or the California Franchise Tax Board assesses
a deficiency, the executor or administrator is liable for the
value of the distributed assets.
There is much detailed work involved in handling all
the tax work, and this can be done by the executor or
administrator if he or she is sufficiently skilled in
tax law. The estate's attorney may perform the tax chores,
too, but most often they're done by the same person
who handled the tax matters of the deceased.
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The Federal Estate Tax
If someone dies while owning over $1,500,000 to $3,500,000,
an estate tax return must be filed within nine months
of the date of death, depending on the year he or she
died. If additional time is needed, a six month extension
is available.
| Exempt from this tax are any amounts left
to qualified charities or to the decedent's spouse, if
he or she is a United States citizen. Debts owed at the
time of death, as well as funeral expenses and legal fees,
can also be deducted from the estate's worth. If the net
estate is still valued at over $1,500,000 to $3,500,000,
a tax on the amount that exceeds the exemption amount
is taxed between 41% - 50%. If the return is not filed
within the required time, or if the tax due is not paid,
substantial penalties and interest charges can result.
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Since the value of the assets is tied to the date of death,
whoever is preparing the tax returns needs to begin gathering
all the necessary information as soon after the death as possible.
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Income Tax Returns - Prior to Death
Although he or she may no longer be able to attend a ball
game or art opening, tax returns are still required for
someone who dies. If Ann Smith dies on June 11, an income
tax return for her needs to be filed by the next April
15 to cover her income received and deductions paid from
January 1 through the date of her death. Any income such
as dividend payments or interest that is received following
her death will be included on her estate income tax return
or by her surviving joint tenant if the asset was held
in joint tenancy.
Only medical expenses paid on behalf of the decedent
within one year of the date of death are allowable as
deductions on his or her final income tax return. All
other deductions must have been paid prior to the death.
It is crucial to review any estimated income taxes
paid for the year of death since estimated payments
may be required to continue. Such payments depend, in
part, on the date of death.
It is a good idea to retain the income tax returns
for the four years before the date of death, and the
return for the year prior to the death should be carefully
reviewed to make sure no deductions or items of income
are forgotten and not carried forward.
If someone dies between January 1 and April 15, or
even later, the status of the prior year's return should
be carefully checked to confirm that no return is still
due. Since it's possible, with extensions, to file an
income tax return as late as October 15 for the prior
year, the current status of income tax filings should
be double-checked. If a return for the prior year has
not yet been filed, an extension can be requested and
is usually granted.
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The Fiduciary or Estate Income Tax Return
Income generated by the estate's assets that arrives following
the date of death is not reported on the decedent's personal
income tax return. If interest, dividends, or other income
is paid to the estate, those payments need to be reported
on the fiduciary or estate tax return. The estate needs
to have a separate tax identification number for the returns,
and the social security number of the deceased should
be retired.
A fiduciary tax return, a separate income tax return,
needs to be filed annually for the estate. This return
will contain lists of taxable income from such sources
as interest, capital gains, net rents, and dividends
along with deductions for mortgage interest, legal and
executor fees, and a few others.
Unlike a personal income tax return, the fiduciary
tax return isn't necessarily tied to the calendar year.
Any month-ending date can be used as the basis for the
estate's fiscal year, but once it's chosen, any returns
must be filed within three and a half months of the
end of the estate's tax year. Thus, if August 31 is
chosen, the fiduciary tax return needs to be filed no
later than December 15.
If the estate hasn't been closed and all its assets
distributed by the end of the tax year, then tax is
paid on any net income. That income is not subject to
an additional tax when it is distributed to the estate's
beneficiaries. If the estate was fully distributed during
the fiscal year, then the tax is paid by the beneficiaries
on his or her personal income tax return, based on his
or her share of the proportionate income, not on estate's
return.
The fiduciary tax returns are required until the estate
is fully distributed and closed. If the estate survives
for more than two tax years, estimated fiduciary taxes
have to be paid each year.
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Additional Taxes
Depending on the nature of the assets contained in the
estate, other taxes may also be due. If real property
is included in the estate, California real estate taxes
are due by December 10th and April 10th. A separate tax
return may be required if there is real property in another
state or country, and separate taxes for the property
may be due. If a business that sells some product is part
of the estate, sales tax collected may also be due. A
gift tax return may be necessary if the person who died
made a gift exceeding $11,000 to someone the year he or
she died.
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Tax Liability
The executor or administrator is liable for any taxes
that are later found to be due if the assets included
in the estate have already been distributed. To prepare
for this, the executor or administrator will often make
a request to retain some estate funds as a reserve against
this possible future tax liability. The funds in this
reserve are typically held for two to three years before
being distributed to the estate beneficiaries without
further court orders.
The federal government has established a tax liability
period of three years from either the date when the
return was due or when it was filed, whichever is later.
California state law allows for a four year period.
Thus, the period of liability for an estate's return
that was filed on or before April 15, 2005 will expire
on April 15, 2008 for the Internal Revenue Service and
a year later, April 15, 2009, for the California Franchise
Tax Board. If the taxes are underpaid by over 25%, a
longer liability period is allowed, and if no return
is filed or fraud is involved, the liability period
has no time limit.
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The Estate's Conclusion
Before the assets contained in the estate can be fully
distributed and the estate closed, the following steps
must have been performed:
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1. All estate assets have been inventoried.
2. The period for creditor claims has expired and all
claims submitted have been paid or otherwise resolved.
3. Any assets selected by choice or necessity have been
sold.
4. All necessary tax returns have been filed and any taxes
due have been paid. |
The court must be petitioned, and a court order obtained,
to make the distributions that will conclude the estate.
The executor or administrator of the estate can either
file an elaborate and thorough accounting that lists
all receipts and disbursements from the estate, or obtain
a waiver of such an accounting from all of the estate's
beneficiaries.
A petition is drafted that summarizes the estate and
all actions taken on its behalf after the accounting
is either filed or waived. The petition will contain
a listing of all assets currently held as well as how
they are scheduled for distribution. The petition will
also show any fees that the executor or administrator
will receive, along with those of the estate attorney.
If the petition is in order and no objections are raised,
the court will issue an order that concludes the estate
by ordering the assets to be distributed and the fees
paid. Once that order is received, checks can be written
to pay the fees and the assets can be re-registered
in the names of the estate's beneficiaries. When the
assets are distributed in this manner, a receipt showing
transfer of the assets is obtained from every recipient
and filed with the court.
This discussion has attempted to cover all likely and probable
contingencies, but not all estates will have the more complex
issues described here. If the estate is relatively simple and
doesn't owe any federal estate tax, it can often be closed in
as few as nine to eighteen months, but can increase to one or
two or more years if an estate tax is due.
THE MAMOLA LAW FIRM, APC is conveniently located throughout Orange County. For additional information, please contact us at (949) 333-6543.
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the information on this website is for informational purposes, no
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information. I may already represent parties adverse to you and cannot
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only in California, and may offer my services only to those residing
or doing business in California, unless associated with local counsel
or lawyer in accordance with other states' laws. The Mamola Law Firm, APC is not currently licensed to practice in the
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