Chapter 1 An Overview
What Is Probate?
What Is Involved in Settling an Estate?
How Long Does It Take to Settle an Estate?
What This Book Covers
Simple Estate Checklist
Important Terms in Probate
The Gross Estate and the Net Estate
The Probate Estate
The Taxable Estate
Debts and Insolvent Estates
Estate Taxes
Do You Need an Attorney?
What Is Probate?
Many people aren’t sure what the term “probate” really means. They think of it only as some long, drawn out, and costly legal formality surrounding a deceased person’s affairs. Technically, probate means “proving the will” through a probate court proceeding. A generation ago, virtually every estate had to be reviewed by a judge before it could pass to those who would inherit it. Today there are several ways to transfer property at death, some of which don’t require formal court proceedings. The term “probate” is now often used broadly to describe the entire process by which an estate is settled and distributed.
For example, a surviving spouse or domestic partner may receive property outright from the deceased spouse or partner without any court probate proceedings at all. Joint tenancy property also escapes the need for formal probate, as does property left in a living (inter vivos) trust and property in a pay-on-death bank account. If an estate consists of property worth less than $150,000, it, too, can be transferred outside of formal probate. Fortunately, the paperwork necessary to actually transfer property to its new owners in the foregoing situations is neither time-consuming nor difficult. We discuss all of these procedures, as well as how to do a formal probate court proceeding.
There is one thing you should understand at the outset: The person who settles an estate usually doesn’t have much choice as to which property transfer method to use. That is, whether you are required to use a formal probate or a simpler method to transfer property at death depends on how much (or little) planning the decedent (deceased person) did before death to avoid probate and how the decedent held title to the assets. This is discussed in detail as we go along.
Both formal probate and some of the other nonprobate procedures involve filing papers at a court clerk’s office, usually in the county where the decedent resided at the time of death. In other words, most probate matters don’t require that you appear in court before a judge. In fact, settling an estate by mail, by fax, or electronic filing is now the norm.
What Is Involved in Settling an Estate?
Generally, settling an estate is a continuing process that:
determines what property is owned by the decedent
pays the decedent’s debts and taxes, if any, and
distributes all property that is left to the appropriate beneficiaries.
When a person dies, she may own several categories of assets. Among these might be household belongings, bank and money market accounts, vehicles, mutual funds, stocks, business interests, and insurance policies, as well as real property. All property owned by the decedent at the time of his or her death, no matter the kind or the value, is called his or her “estate.”
To get this property out of the name of the decedent and into the names of the people who inherit it requires a legal bridge. There are several types of legal procedures or bridges to move different kinds of property to their new owners. Some of these are the equivalent of large suspension bridges that will carry a lot of property while others are of much less use and might be more analogous to a footbridge. Lawyers often call this process “administering an estate.” In this book we refer to these procedures collectively as “settling an estate.”
Most of the decedent’s estate will be passed to the persons named in his or her will, or, if there is no will, to certain close relatives according to priorities established by state law (called “intestate succession”). However, to repeat, no matter how property is held, it must cross an estate settlement bridge before those entitled to inherit may legally take possession. The formal court probate process is but one of these bridges. Some of the other bridges involve community property transfers, clearing title to joint tenancy property, transfer to a beneficiary designated by contract, winding up living trusts, and settling very small estates that are exempt from probate.
How Long Does It Take to Settle an Estate?
If a formal probate court procedure is required, it usually takes nine to twelve months to complete all the necessary steps, unless you are dealing with a very complicated estate. On the other hand, if the decedent planned his or her estate to avoid probate, or the estate is small, or everything goes to a surviving spouse or domestic partner, then the estate may be settled in a matter of weeks by using some easier nonprobate procedures. See the checklist for formal probate in Chapter 13, for details about the typical length of a formal probate administration.
The procedures in this book are only for California estates. Real property and tangible personal property (see Chapter 4 for definitions) located outside of California are not part of a California estate and cannot be transferred following the instructions in this book. To transfer property located outside of California, you will either have to familiarize yourself with that state’s rules (these will be similar, but by no means identical to those in effect in California) or hire a lawyer in the state where the property is located.
What This Book Covers
Not all estates can be settled entirely by using a self-help manual. Although many California estates can be settled with the procedures described in the following chapters, some estates will require at least some formal legal assistance. Therefore, it’s important to know if the estate you are dealing with has complexities beyond the scope of this book.
First, an estate that can be settled using this book (a “simple estate,” for lack of a better term) is one that consists of the common types of assets, such as houses, land, a mobile home, bank accounts, household goods, automobiles, collectibles, stocks, money market funds, promissory notes, etc. More complicated assets, such as complex investments, business or partnership interests, or royalties from copyrights or patents, are often not as easy to deal with because they involve additional factors, such as determining the extent of the decedent’s interest in the property and how that interest is transferred to the new owner. However, it may be possible to include unusual assets in a simple estate if the person settling the estate is experienced in such matters or has help from an accountant or attorney along the way. When questions arise as to ownership of an asset, or when third parties (anyone not named in the will and not an heir under state law) make claims against the estate (as would be the case if someone threatened to sue over a disputed claim), you have a complicated situation that will require help beyond this book.
Second, for an estate to be “simple” there should be no disagreements among the beneficiaries, especially as to the distribution of the property. There is no question that dividing up a decedent’s property can sometimes bring out the worst in human nature. If you face a situation where family members are angry and lawsuits are threatened, it is not a simple estate. To settle an estate without unnecessary delays or complications and without a lawyer, you need the cooperation of everyone involved. If you don’t have it (for example, a disappointed beneficiary or family member plans to contest the will or otherwise engage in obstructionist behavior), you will need professional help. (See Chapter 16.)
Third, and contrary to what you might think, a simple estate does not have to be small. An additional concern with a large estate is federal estate taxes, which affect estates valued over approximately $11.2 million (in 2018). Estate income tax returns may also be required. You can hire an accountant who is familiar with estate taxes to prepare the necessary tax returns for you, leaving you free to handle the rest of the settlement procedures yourself. We provide an overview of estate taxation in Chapter 7.
Even if you plan to get legal assistance to administer the estate—either because the estate is not simple or because you prefer to have an experienced person guiding the process—you may find this book helpful. Understanding the process will help you serve as the personal representative with confidence. Also, if you are a beneficiary, you may want to learn about the process so that you can have realistic expectations about what must be done before you get your inheritance.
This book does not cover the details of trust administration. Many people in California create a living trust to avoid a court probate procedure at their death. If the decedent set up a trust, the person named in the trust will need to follow the terms of the trust to distribute the assets of the trust. Administering a trust has its own legal requirements, which are not discussed in detail in this book.
Simple Estate Checklist
The checklist below shows all the basic steps in settling a simple estate in California. Each step is explained later in the book.
This list may appear a bit intimidating at first, but don’t let it discourage you. Not all of these steps are required in every situation, and even then you won’t find them difficult. As with so many other things in life, probating a simple estate is much like putting one foot in front of the other. If you understand the big picture, take it step-by-step, pay close attention to the instructions, and get professional assistance when needed, you can have a smooth and successful administration.
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How to Start Settling a Simple Estate
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1. Assemble Important Documents
• Locate the will, if any, and make copies.
• Order certified copies of the death certificate.
• Locate other documents relevant to assets, including account statements, deeds,
insurance policies, and beneficiary designation forms.
• Locate other important documents, including marital agreements and trusts.
2. Determine the People Involved
• Determine who will be the estate representative.
• Determine heirs and beneficiaries and prepare a list of names, ages, and addresses.
3. Determine Assets and Creditors
• Assemble and list assets such as properties, bank accounts, and retirement accounts.
• Determine how title is held to each asset (for example, in the decedent’s name alone,
in joint tenancy, in a living trust, etc.).
• Determine whether each asset is community or separate property.
• Estimate the value of each asset and, if the decedent was a co-owner,
the value of the decedent’s share.
• List debts and obligations.
4. Determine Procedures Required and Begin Process
• Determine decedent’s legal residence.
• Determine methods for transferring assets.
• Initiate procedures to administer estate and transfer assets. Possible procedures include:
• terminate joint tenancies
• transfers of some estates worth $150,000 or less without formal probate administration
• spousal / domestic partner transfer procedures
• formal court probate administration, and
• trust administration.
• Pay debts having priority as soon as estate funds are available, if the estate is solvent.
5. File Tax Returns and Arrange for the Payment of Taxes
• Arrange for final income tax returns and estate fiduciary income tax returns, if required.
• Prepare and file federal estate tax return, if required.
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Important Terms in Probate
As you read through this material, you will be introduced to a number of technical words and phrases used by lawyers and court personnel. We define these as we go along, with occasional reminders. If you become momentarily confused, refer to the glossary, which follows Chapter 16.
The Gross Estate and the Net Estate
You will encounter the terms “gross estate” and “net estate” while settling an estate. The decedent’s gross estate is generally the fair market value at date of death of all property that he owned. It includes everything in which the decedent had any financial interest—houses, insurance, personal effects, automobiles, bank accounts, unimproved land, businesses, and so on. It includes only the decedent’s portion of the asset. How the decedent owned the property (for example, in a living trust, in joint tenancy, or as community property) may determine the decedent’s portion for the purposes of the gross estate. The net estate, on the other hand, is the value of what is left after subtracting from the gross estate the total amount of any mortgages, liens, or other debts owed by the decedent at the time of death.
Example 1: Suppose Harry died, leaving a home, car, stocks, and some cash in the bank. To arrive at his gross estate you would add the value of all his property without looking to see if Harry owed any money on any of it. Let’s assume that Harry’s gross estate was $500,000. Now, assume when we check to see if Harry owed money, we discover that he had a mortgage of $150,000 against the house. This means his net estate (the value of all of his property less what he owed on it) would be worth $350,000.
Example 2: If Diego and Louisa, husband and wife, together own as community property a house, car, and savings account having a total gross value of $800,000, and owe $300,000 in debts, the net value of their community property would be $500,000. However, if Louisa died, only one-half of their property would be included in her estate because under California community property rules, discussed in detail in Chapter 4, the other half is Diego’s. Thus, Louisa’s gross estate would be $400,000 and her net estate $250,000.
The Probate Estate
The “probate estate,” quite simply, is all of the decedent’s property that must go through probate. This is very likely to be less than the total amount of property the decedent owned, because if an asset already has a named beneficiary, or if title is held in a way that avoids probate, then it isn’t part of the probate estate. To return to the bridge analogy discussed earlier, this means that property held in one of these ways can be transferred to the proper beneficiary using one of the alternate (nonprobate) bridges.
As a general rule, the following types of property need not be included in a probate administration:
joint tenancy property
life insurance with a named beneficiary other than the decedent’s estate
pension plan distributions
property in living (inter vivos) trusts
money in a bank account that has a named beneficiary who is to be paid on death
individual retirement accounts (IRAs) or
other retirement plans that have named beneficiaries
community property or separate property that passes outright to a surviving spouse or domestic partner (this sometimes requires an abbreviated court procedure), and
real estate transferred with a transfer-on-death (beneficiary) deed.
Put another way, the probate estate (property that must cross the formal probate bridge) consists of all property except the property that falls into the above categories. Where there has been predeath planning to avoid probate, little or no property may have to be transferred over the probate court bridge.
You can simplify the settlement of your own estate. Resources covering this subject are Plan Your Estate, by Denis Clifford (Nolo), and 8 Ways to Avoid Probate, by Mary Randolph (Nolo). You can also find lots of good information at Nolo’s Wills, Trusts & Probate Center at www.nolo.com.
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Overview of How to Settle an Estate in California
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Preliminary steps: Collect information and documents (Chapters 2, 3, 4).
List assets, determine date-of-death values and figure out how title is held (Chapters 5, 6).
File federal estate tax return (IRS Form 706):
(1) if gross value of estate exceeds estate tax exclusion amount, or (2) if decedent was married and claiming deceased spouse’s unused exclusion amount (Chapter 7).
Use procedures to transfer or collect non-probate assets.
Collect assets passing to named beneficiaries by beneficiary designation—such as insurance, retirement, and death benefits (Chapter 2).
Clear joint tenancy, pay-on-death, or transfer-on-death in name(s) of survivor(s) (Chapter 10).
Trust administration procedures for assets held by trust (Chapter 12).
Assets held as community property with right of survivorship (Chapter 15).
For assets passing to surviving spouse or partner either by will or by intestate succession, confirm title to surviving spouse or partner with a Spousal or Domestic Partner Property Petition (Chapter 15).
If remaining estate is $150,000 or less, transfer assets using simplified procedures for small estates (Chapter 11).
If remaining estate is greater than $150,000, or if other complications exist, initiate court probate administration to transfer assets to beneficiaries (Chapters 13, 14).
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The Taxable Estate
Although this book is primarily about settling an estate, we include some mention of taxes because estates over a certain value are required to file a federal estate tax return. Therefore, you should know how to compute the value of the decedent’s estate for tax purposes, which—not surprisingly—is called the “taxable estate.” Keep in mind that the property that must go through probate (probate estate) is not necessarily the same as the taxable estate. Not all assets are subject to probate, but they are all counted when determining whether estate taxes must be paid. In other words, the taxable estate includes all assets in the decedent’s control just prior to death. The taxable estate may include assets subject to formal probate, plus joint tenancy property, life insurance proceeds (if the decedent was the owner of the policy), death benefits, property in a living trust, and property in any other probate avoidance device. However, if any of the assets are community property (discussed in Chapter 4), only the decedent’s one-half interest is included in his or her taxable estate.
If the estate is large enough to require a federal estate tax return, any tax is computed on the net value of the decedent’s property (net estate). That is, the tax is determined by the value of all property, less any debts owed by the decedent and certain other allowable deductions.
Debts and Insolvent Estates
Creditors are divided into classes according to their respective priorities. (Prob. Code § 11420.) First priority is given to debts owed to the United States or to the State of California, such as various taxes. Those debts must be paid before other debts or claims. (Prob. Code § 11421.) Next in priority are administration expenses (attorneys’ fees, court costs, etc.) and, after that, funeral expenses, last illness expenses, judgment claims, and general creditors are paid, in that order. Each class is paid in full before going to the next class.
When you come to a class that cannot be paid in full, the payments are prorated. For example, if Creditor One is owed $5,000 and Creditor Two is owed $10,000 and only $1,000 is left, Creditor One gets one-third of the $1,000 and Creditor Two gets two-thirds. An accounting must be presented for insolvent estates in a formal probate court proceeding. If using small estate procedures (Chapter 11), the successors are responsible for paying the decedent’s unsecured debts out of the property they receive. The debts are paid in the same order, and the successors are not personally liable for debts that exceed the value of the estate property.
An “insolvent estate” is one that does not have enough assets to pay creditors in full. Insolvent estates are subject to special rules and we do not include specific details here. Usually you must consult an attorney.
Estate Taxes
Most estates will not owe estate taxes. A person who dies in 2018 may own assets worth up to approximately $11.2 million without owing any federal estate taxes. This exclusion amount will rise with inflation. Estates having a gross value over the exclusion amount must file a federal estate tax return. The tax is computed on the net estate after certain allowable deductions have been taken.
If the net estate is under the exclusion amount, a return must still be filed if the estate has a gross value over the exclusion amount, although no tax may be owed. For example, if someone who dies in 2018 has a gross estate of $11.5 million and debts of $400,000, a federal estate tax return must be filed, even if the debts reduce the net value of the estate to less than the exclusion amount. Also, if the decedent was married, you may choose to file a federal estate tax return for an estate under this amount to claim “portability” of the decedent’s unused exclusion amount for the surviving spouse’s estate. We discuss federal estate tax in more detail in Chapter 7.
California does not impose its own inheritance tax or estate tax.
Pay taxes first. Although most estates don’t have to worry about federal estate taxes, if yours is a large estate for which federal estate taxes are due, the taxes should be paid before property is transferred to the people who inherit it. Many wills set aside money for the payment of taxes.
Federal and state income tax returns for the decedent’s last year and sometimes for the estate (if there is a formal probate) must also be filed. (See Chapter 7.)
Do You Need an Attorney?
Being the estate representative, in itself, is an important job that can provide satisfaction of handling the decedent’s estate with care. You will have responsibility for assembling assets, paying bills, managing the assets of the estate, and ultimately making distributions. The law does not require you to hire an attorney to assist you to settle an estate.
All of that said, probate is a legal process with unique rules. Hiring a lawyer who has the training and experience to maneuver through the relevant laws and procedures can make the process more smooth. Having a professional as a guide can allow you to focus on your own responsibilities with less stress.
If the estate is simple, if you have the time and desire to devote to learning the required procedures and following through, and particularly if you are the only beneficiary, you might choose to proceed without a lawyer. This book provides guidance and information on the process to help you recognize situations that may require legal assistance.
Complications that require special knowledge or handling may crop up even in an otherwise simple estate. Some examples are:
Ambiguities in the will. For example: “I give $50,000 to the poor children in the County Hospital.” This would raise several problems. Does “poor” mean low income or just unfortunate enough to be in the hospital? And what did the decedent intend when it came to dividing the money? Is it to be divided among all the children in the hospital, or did the decedent intend to set up a central fund to be used to make life a little easier for all kids in the hospital?
Contested claims against the estate (for example, a surviving spouse or domestic partner who claims a community property interest in property left by will to someone else);
The decedent’s unfinished contracts (for example, a sale of real property begun but not completed prior to death);
Insolvent estates (more debts than assets);
Claims against the estate by people who were left out or think they were given too little; or
Substantial property given to a minor, unless legal provisions to handle this are made in the will.
In a probate court proceeding, standard attorneys’ fees have been set by law and are based on a percentage of the gross estate (the gross value of the assets that are subjected to probate). It’s important to understand, however, that even though allowed fees are set out in the statute, you have the right to negotiate a lower fee with your lawyer. In other words, think of these statutory fees as the maximum the attorney is allowed to charge, and negotiate downward from there, considering the particular circumstances of the estate. On the other hand, for a particularly complicated estate needing out-of-the ordinary legal services, the lawyer can seek court approval for additional compensation.
The formula for computing attorneys’ fees in a formal probate court proceeding is found in California’s Probate Code Sections 10810 and 10811. The fee is calculated as follows:
4% of the first $100,000 of the gross value of the probate estate
3% of the next $100,000
2% of the next $800,000
1% of the next $9,000,000
0.5% of the next $15,000,000, and
a “reasonable amount” (determined by the court) for everything above $25,000,000.
For example, in a probate estate with a gross value of $150,000, the fee set by statute is $5,500; in an estate with a gross value of $200,000, the attorney fee is $7,000, and so on. Some circumstances may allow you to negotiate a lower fee with an attorney. For example, if a probate estate contains only one piece of real property, perhaps a home worth $600,000, the statutory attorney fee would be $15,000, even if the home might have a substantial mortgage that reduces the decedent’s equity to only $150,000. An attorney may be willing to accept a lesser fee, particularly if the estate has no complicating factors.
Attorneys’ fees in a formal court proceeding are paid out of the estate after being approved by the court, usually towards the end of the probate process. Chapter 16 provides information about working with an attorney.
If an estate doesn’t require formal probate because it can be settled in another way, such as a community property transfer to a surviving spouse or domestic partner or a joint tenancy termination, a statutory fee does not apply. In these situations, an attorney will bill for his or her time at an hourly rate, which commonly varies from $200 to $450 an hour.
Example: Returning to Harry’s estate for a moment (discussed above), if a lawyer were hired to probate Harry’s estate, the attorney’s fee could be up to $13,000, computed on a gross estate of $500,000. Let’s assume that Harry’s will left all of his property to his daughter, Millicent, and son, Michael, and one of them, acting as executor, probated Harry’s estate without an attorney and also waived the executor’s fee. The entire job could be accomplished for the cost of administration expenses only, which would amount to about $2,000 (including filing, publication, certification, and appraisal fees).
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Executor’s Fees
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In a probate court proceeding, the court appoints a personal representative to handle the estate, called either an “executor” (if there is a will) or an “administrator” (if the decedent died without a will or without naming an executor in his or her will). This person is entitled to fees, called the estate representative’s “commission.” These fees are set using the same statutory formula as for the attorney, see above. The estate representative cannot be paid from the estate until approved by the court, usually towards the end of the probate process. Because the commission is subject to income tax, close family members or beneficiaries who serve as executor or administrator sometimes choose to waive the executor’s or administrator’s fee.
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When a friend or loved one dies, the natural grief process can make administrative tasks particularly challenging. Participating in the process of settling an estate, however, sometimes becomes a tangible way to approach the grief. Whether or not you choose to get legal assistance from the start, learning about the process, organizing relevant information, and proceeding in a responsible, diligent way can honor the deceased and care for beneficiaries or heirs. This book can help with that process.
