Ways for Avoiding Probate in California
Ways for Avoiding Probate in California
The probate process remains a mystery to many California consumers seeking legal advice. While most Californians will tell their estate planning attorney that they want an estate plan, which avoids probate, few understand what that really means. Common misperceptions include the belief that (1) avoiding probate avoids estate taxes, (2) trusts eliminate all estate taxes and (3) probates are only required when someone dies without a will (i.e., intestate). The purpose of this short article is to help the California legal consumer understand when a probate through the California courts is required to administer a decedent’s estate. A discussion concerning why it is important to avoid probate will be addressed in a later article.
Simplistically, probate is required when there is no other mechanism provided by law for transferring ownership of a decedent’s assets from the decedent to decedent’s intended beneficiaries. The probate process is generally completed when title to the asset is changed into the name of the intended beneficiary through the court’s final order for distribution. The probate process can be thought of as simply the last option for transferring title from the decedent to the intended beneficiaries, when no other options work. (See California Probate Code §7001)
The legal mechanisms available for transferring ownership of an asset outside of probate (i.e., avoiding probate) in California can generally be summarized as follows:
- By operation of law, including by right of survivorship and the Multi-Party Account Laws.
- By contract including beneficiary designation;
- By trust; and
- By summary probate procedure.
By operation of law: The California Probate Code contains the California Multi-Party Account Laws (Probate Code §§ 5100 – 5401). These rules generally determine who owns the funds within a bank account, although the contract establishing the account (usually the signature card) can vary the rules. These Multi-Party Account Laws provide generally that, upon the death of one of the individuals listed on the account, the funds in the account are owned by the remaining individuals. The decedent’s share of the funds passes by the terms of the contract (i.e., signature card) and if unspecified by contract, then by operation of law (the Multi-Party Account Laws) to the surviving individuals. The transfer of title is accomplished by providing a death certificate to the financial institution holding the account. The financial institution in turn generally opens a new account in the name of the surviving individual. The decedent’s will does not control the distribution of the funds, and no probate is required.
By right of survivorship: The California Civil Code allows real property owners to designate who will succeed to their property on death through the manner in which title to the asset is taken. Specifically, two individuals can hold title to an asset in “joint tenancy,” which by definition includes the term “right of survivorship.” (See California Civil Code §683) Spouses may also hold property as community property with right of survivorship. (See Civil Code §682.1) Unlike joint tenancy, which by definition always includes the right of survivorship, community property without the specific designation “by right of survivorship,” does not pass by survivorship but is controlled by the decedent’s will. With right of survivorship, on the death of one joint tenant or spouse, the asset is owned entirely by the surviving joint tenant or spouse. The transfer of title is accomplished generally through the recording of a death certificate and affidavit concerning the death with the county recorder’s office where the property is located. The right of survivorship characteristic under the Civil Code applies to both real property and personal property, but not to bank accounts, which are governed under the Probate Code’s Multi-Party Account Laws. The decedent’s will does not control the distribution of the asset and no probate is required
By beneficiary designation: The California Probate Code contains the Nonprobate Transfer Rules, which are found in California Probate Code §§ 5000 – 5705. The rules provide a broad endorsement to transfers on death by way of beneficiary designation. This encompasses most typically the standard life insurance beneficiary designations and retirement account beneficiary designations. On the death of the insured or the employee (i.e., the owner), the funds in the account pass to the individual that the owner designated on a beneficiary designation form filed with the financial institution (i.e., insurance company or employer). The Nonprobate Transfer Rules also endorse the transfer of death of securities through specific registration as “TOD” (transfer on death) or “POD” (pay on death). On the death of the owner of the security, the security passes to the beneficiary named on the instrument (or named on account) as the payee. This transfer is accomplished by providing a death certificate (and other documentation) to the transfer agent for the security. The decedent’s will does not control the distribution, and no probate is required.
By trust agreement: Assets held in trust have universally escaped the probate process. Initially, at common law, trusts required three parties, a settlor who established the trust, a trustee who manages the trust, and a beneficiary who receives the benefit of the trust. Under this arrangement, legal title is held by the trustee, as opposed to the settlor or beneficiary. To be valid, the settlor has to convey property to the trustee during the settlor’s lifetime. The trustee is considered the legal owner of the property. Since the settlor or beneficiary is not the legal owner, the death of the settlor or beneficiary does not affect the ability of the trustee to hold or transfer legal title, and thus no probate is required. Over time, the common law requirements for a third party trustee have largely vanished, with the settlor often acting as the initial trustee. Nonetheless, the probate avoidance feature has continued to be recognized and is codified in the California Nonprobate Transfer Rules. (See California Probate Code §5000(a))
By summary probate procedure: The California Probate Code contains certain summary probate procedures, which effectuate the transfer of the asset by the decedent’s will without the need for a full probate. Transfer by summary probate procedure is generally much quicker and less costly than a conventional probate, even when some court action is required. The types of estates, which may be transferred pursuant to one of the summary probate procedures, include estates:
- with personal property not exceeding $100,000 in aggregate value. (See California Probate Code §§ 13100 – 13116) Transfer occurs by way of an affidavit (referred to generally as a small estate affidavit or 13100 affidavit), signed by the beneficiary under the decedent’s will and presented to the financial institution. No court filing is required.
- with real estate of less than $20,000. (See Probate Code §§13200 – 13210) Transfer occurs by appraisal and an affidavit (referred to generally as a small estate affidavit for real property or a 13200 affidavit) executed by the beneficiary and filed with the court. No court hearing is required
- with real estate of less than $100,000. (See Probate Code §§13150- 13158) Transfer occurs by appraisal and a separate petition (referred to generally as a petition for succession to real property or a 13150 petition) executed by the beneficiary and filed with the court. A court hearing is required.
- where the asset (regardless of type) passes under the will or by intestate succession to the surviving spouse. (see California Probate Code §§13500 – 13660) The transfer occurs by way of a separate petition (generally referred to as a spousal property petition) executed by the beneficiary and filed with court. A court hearing is required.
©2010 by Carico Johnson Toomey LLP
Posted in: Articles