By Wagner Kirkman Blaine Klomparens & Youmans LLP
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.
Probate is also when creditors of the deceased can appear before the court and make their claims for payment. Under the law, they have a fixed period of time to do so and demand payment.
In addition to ensuring 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 for 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 – currently $5,000,000 – 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.
Probate isn’t involved or necessary for every asset that someone owns when they die, but it is regularly used for the following assets:
- Assets that were held in only the deceased’s name
- Half of each asset that was registered with his or her spouse as community property
- That portion of any asset that belonged to the deceased that they held as a registered tenant in common with other people
- 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 (not including motor vehicles or certain other assets), probate is not necessary under California law. The assets that are not subject to probate receive a simplified procedure for their transfer.
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:
- Assets that are held in joint tenancy
- Assets that are held in a living trust
- Assets where a beneficiary is named, such as IRA benefits or life insurance policies
- Assets held in a bank or credit union where the deceased was named as a trustee for another person
- Assets that were registered in the person’s name that are “payable on death” or “transferred on death” to another person
- Assets registered by a married couple as community property with the right of survivorship
- 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.
Example: 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 savings 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.
One of the first questions following someone’s death is whether or not there will be a probate proceeding. If all of the decedent’s assets are held in a living trust or in joint tenancy, no probate is required. However, if the person has over $100,000 of assets in his or her name 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 estate must first be named.
What Happens When There Is a Will
If there is a will, someone was named to serve in this role; and the person named does not need to 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.
What Happens When There Is No Will
If no will exists, the nearest relative or relatives have the first right to serve as estate representatives or to nominate someone else to perform the duties. While someone named in the will is called the executor, anyone appointed by the court is called the administrator, though the duties are otherwise identical.
The decedent’s will may fail to name an executor, or that person may be deceased or refuse to serve. It is also possible that a bank was named, but the bank declined because the estate was 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.
Probate begins 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 court sets a hearing date of approximately thirty days following the filing of the petition.
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. This “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.
Handling of Notices
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.
Proving the Will
The will may contain special wording near the end (where the witnesses sign) that makes the will “self-proving.” In this case, no additional statements from the witnesses 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.
Surety Bond Requirements
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 $800 and up, is typically paid from the estate.
Appointment of Executor or Administrator
If all the above steps have been taken and there are no objections to the probate petition, 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 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.
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.
Title Changes for Collected Assets
The title of 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 of the following:
- Stocks and Bonds
- Mutual Funds
- Brokerage Accounts
- Bank and Credit Union Accounts
- Physical assets such as real property, motor vehicles, boats, and planes
Asset Inventory and Determining Fair Market Value
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. The referee 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.
Example: For a home valued at $300,000, the referee 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.
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.
Claim Submission Requirements
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.
Creditor’s Rights
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.
Example: 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.
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.
Two Ways to Sell Assets
The executor or administrator may select between one of two ways to sell the assets:
- Using Court Approval: The executor or administrator must obtain court approval 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.
- Using the Independent Administration of Estates Act: 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. This budget includes an estimate of the following:
- Federal estate taxes
- Any attorney or executor fees
- Administrative costs
- Debts or claims on the estate
- 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 months.
It is 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.
If someone dies owning more than $5,000,000 in assets, an estate tax return must be filed within nine months of the date of death. If additional time is needed, a six month extension to file the return is available, however, any tax due must be paid at the initial nine-month deadline.
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.
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.
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.
Example: If Ann Smith dies on June 11, an income tax return for her must 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.
Allowable Deductions
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.
Retaining Income Tax Returns
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.
Filing Income Tax Returns
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.
Income generated by the estate’s assets that arrive 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 must 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.
Filing Requirements
A fiduciary tax return, which is 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 are 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 the 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.
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 $13,000 to someone the year he or she died.
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, 2010, will expire on April 15, 2013, for the Internal Revenue Service and a year later, on April 15, 2014, 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.
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:
- All estate assets have been inventoried
- The period for creditor claims has expired, and all claims submitted have been paid or otherwise resolved
- Any assets selected by choice or necessity have been sold
- All necessary tax returns have been filed, and any taxes due have been paid
Petitions and Court Orders
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.
Conclusion of the Estate
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 name of the estate’s beneficiaries. When the assets are distributed in this manner, a receipt showing the 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.
References:
http://www.wkblaw.com/practice-areas/estate-planning-probate-and-trust-administration/overview-california-probate-process