At death, property passes one of three ways. The first is by law (e.g. a life insurance policy where you have designated a beneficiary). The second is by trust (a legal document executed by you). The third is by probate. In California, the probate process is not necessarily complex, and in some circumstances, there are alternatives. If one does not qualify for one of these alternatives, however, then a full probate will be necessary. Here are the answers to four questions surrounding the probate process.
1. What is Probate?
Probate is the court-supervised process of distributing a deceased person's assets to his or her heirs. It is a necessary process when either a person dies with only a will and has other probatable assets (i.e. assets that do not pass by law), or when a person dies intestate, meaning her or she doesn't have a will at all.
You can probably imagine several circumstances in which the supervision of a court might be necessary: family feuding, proposed heirs coming out of the woodwork and claiming a right to the decedent's property, and creditors claiming they are owed money, to name a few. Because probate requires court involvement, and because California has a huge population, the courts are heavily burdened. The average probate takes between six months to a year, if everything goes smoothly. We've seen some last just under two years!
2. What Does the Probate Process Entail?
The probate process can vary from county to county, and from state to state. The following pertains specifically to California. When a person dies with a will, he or she will have named an executor. If a person dies without a will, usually a family member or close friend will seek appointment as administrator from the court. After death, the executor will file the will and a petition for probate with the court in the county in which the decedent lived. The administrator will only file the petition for probate (as there won't be a will to file). The executor/administrator may have to file additional documents and give notice to potential heirs and creditors. Keep in mind that creditors have four months to make any claim(s) they may have against the estate. Next, a hearing will be held at which the executor will prove that the will is valid. After these things are successfully completed, a court will issue Letters Testamentary or Letters of Administration which will allow the executor or administrator authority to handle the estate.
The executor/administrator will at that point need to inventory all assets belonging to the estate and get an appraisal of their values. This can be tricky, especially if the decedent owned any businesses. Further, he or she will need to address any payments that need to be made, figure out a system to track both income and expenses during the probate process, and establish a tax ID number on behalf of the estate. Assets must be safeguarded and properly managed, and it is the executor/administrator's job to do so with the utmost care. The executor/administrator will thus generally have to file an accounting with the court.
Once all estate assets have been inventoried and appraised, bills and other debts, including taxes, have been paid, and the court resolves any outstanding disputes, the estate will be ready to be closed. A court order will be necessary to distribute the remaining assets out to the heirs, and for the executor/administrator to request fees for his or her services. California state law sets limits on fees that executors, administrators, and attorneys may receive (more on costs below). Where there is a will, property will be distributed in accordance with the will document. Where there is no will, property will be distributed according to California's intestacy laws.
It is important to note that when a person dies owning probatable property in multiple states, a probate will have to be opened in each state.
3. Is Probate Required?
There are certain circumstances that do not require a full probate. First and as stated above, if property transfers by law, probate is unnecessary. The following are common examples of ways that property can pass by law: Holding title to real estate as joint tenants with another person; designating a beneficiary on a bank account or insurance policy; a husband and wife owning something in a community property state.
Furthermore, if the total estate value is less than $150,000, a full probate is not necessary. Heirs can instead use the out-of-court summary probate process. Summary Probate requires the inheritor to sign an affidavit under oath, stating that he or she is entitled to the property. Presenting the affidavit along with the decedent's death certificate will allow the transfer to pass directly to the heir.
Finally, a probate alternative is available when the inheritor is a surviving spouse or registered domestic partner. In this case, the surviving spouse will execute a Spousal/Domestic Partner Property Petition. Though the probate court will evaluate the petition, the process is simple, quick, and unlike summary probate for small estates, has no limit on the value of property that can be passed.
Note: A new probate alternative/estate planning tool will be available beginning in January, 2016. Stay tuned for an upcoming blog post regarding AB 139, which was recently signed by Governor Jerry Brown. The new law will affect the transfer of real property.
4. How Much Does Probate Cost?
Attorney Fees. California is one of the few states that allow attorneys to charge a statutory fee for assisting with probate work. The amount will depend on the total gross value of the probate estate, i.e. the amount before any taxes, bills, or other creditor claims are addressed. The fees are currently laid out in California Probate Code §10810 and §10811, and are reprinted here:
- 4% of the first $100,000;
- 3% of the next $100,00;
- 2% of the next $800,000;
- 1% of the next $9,000,000;
- .5% of the next $15,000,000.
If you live in the Bay Area, you know that real estate values are at an all time high. If your only asset is a home that is worth $1.5 million, and it is not held in trust, cannot pass by law, and is not passing directly to your spouse through a Spousal/Domestic Partner Property Petition, an attorney will be able to charge you $28,000 in attorney fees. That is $28,000 that will not pass to your heirs, but will instead go directly to your estate attorney.
$28,000 in income sounds good to just about anyone. But believe it or not, we hate to see wealth that could have so easily be saved and transferred to the next generation be removed from the estate in the form of fees.
Our goal as estate planners is to maximize estate values while effectuating decedents' wishes. Therefore, we encourage our clients to spend a fraction of that cost up front and form an appropriate estate plan so that probate may be avoided.
Court Costs. Court costs can also add to the legal bill. Petitions for Probate cost upwards of $400 to file, and there is generally a lesser fee for filing any subsequent documents. Filing fees can be found on the website for the county in which you intend to open a probate proceeding.
Executor/Administrator Fees. Similar to the attorney, the executor or administrator (known collectively as the "personal representative") is entitled to compensation. The amount of the compensation can take two forms. If the will mentions compensation, the executor will receive the specified amount, unless there is a court order either increasing or decreasing that amount. If the will is silent as to compensation or if there is no will, the personal representative is entitled to statutory compensation. The fee scheme is laid out in California Probate Code §10800 and mirrors that of the attorney fees, mentioned above.
Cost of Your Time. As stated at the outset of this post, the entire probate process takes time. It can be burdensome on family members, especially in light of dealing with a loved one's death. The Court process, absent extreme circumstances, is public, and can further your stress during an already difficult time.
Probate is necessary and absolutely appropriate in many circumstances. However, while many may regard estate planning as burdensome, complex, and expensive, the alternative (probate) presents its disadvantages in all three categories. Proper planning now can save your loved ones' time, maximize your transfer of wealth, and ensure your wishes are properly carried out.