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Summary of the Probate Process in California 

  Once you have figured out that a probate is needed in California, here is a summary of what is involved in a probate process. The first step is that the probate attorney will meet with the client to review what assets and liabilities are left behind by the deceased and collect important documents such as : 1) any original Will, 2) death certificate and 3) financial records. The probate attorney will identify the heirs, devisees and beneficiaries. Heirs are those who rightfully have a stake in the estate if there is no Will, devisees are those named in the Will to receive assets from the estate, and beneficaries are those specifically named on “Will substitutes”, documents such as a trust, life insurance policy or retirement accounts. The next step that the probate attorney takes is to petition the court to appoint the daughter, son, wife or whomever as the personal representative (PR) of the estate. The probate attorney will ask the court that full authority be given to administer the estate under the Independent Administration of Estate Act, known as IAEA. The full authority under the IAEA will allow the estate to sell the house just like any other real estate transaction IF the Notice of Proposed Action is given to all the heirs that the house is being sold. Unless the Will waives bond or all the heirs waive bond, then the PR must post a bond as an insurance policy against losses dues to the PR’s wrong doing. Next, the Notice of Petition to Administer Estate must be filed and served to all heirs within 15 days before the first court hearing. Probate Code 8121 requires that the probate be published in a newspaper of general circulation in the city where the decedent resided at the time of death. A very important court form that is needed before you can sell the house is called “Letters”. The certified “Letters” form allows the PR to sell the house, access the deceased’s bank accounts, pay the creditors or take any other actions that are required to administer the estate. However, before “Letters” can be issued; there is a form called the “Statement of Duties and Liabilities” that must be filed with the court. This form lists all the PR’s responsibilities and because of all those duties, the PR gets exactly the same statutory probate fees listed in Probate Code 10800 that the probate attorney would be entitled to. The basic purpose of a probate and the function of the PR are to collect the decedents assets, pay the debts and taxes, and distribute the decedent’s property to the heirs. Every single probate requires that an Inventory & Appraisal Form ( I& A) be filed with the court. If the PR has full authority then the estate does not have to sell the house for the required 90% minimum of the value listed in the I & A Form. The I & A Form has to be filed with the court within four months after issuance of Letters (Probate Code 8800). The PR must also file a change in ownership statement with the county. The PR also needs to file and mail a form called “Notice of Administration of the Estate” to all known and reasonably ascertainable creditors and to the required public entities (such as the Department of Health, California Victim Compensation, and the FTB). After the house has been sold, creditors are paid, and taxes have been accounted for, then the estate can be put to rest by petitioning the court to close the estate. It is important to understand that the heirs CANNOT use any of the proceeds from the sale of the house until the court approves the distribution of the proceeds. The court will approve the distributions once the probate attorney prepares and files the Final Petition with the court that details how much the house was sold for and how much was paid to the creditors and how much is left for distribution to the heirs. When the court approves it then that is when everybody, including the PR and probate attorney, and the heir get their money. Then the probate case can be put to rest.


What are the differences between a Living Trust and a Will?

Each of us has assets, whether they are houses in our name, cars, or jewelries. Most of us would like to have control over those assets and have the final say in who gets what once we are gone. Most people understand that a Will or a Living Trust accomplishes that. But there are significant differences between a Will and a Living Trust.  A Living Trust avoids probate. A Living Trust avoids conservatorship. And, a Living Trust allows control over the distribution of assets. Which one should you choose? Below is brief overview of the advantages and disadvantageous of each. Avoiding Probate The advantage of a Living Trust vs. a Will is that no probate is necessary. The administration of the Living Trust is carried out by a trustee. The son, daughter, or whomever your client chooses as the successor trustee. It is often said that “if there is a will, there is a way”. If there is only a Will and the combined assets left behind are over $150,000, there is always going to be a probate. If your client left a Will that says a daughter is to inherit a house that is worth $600,000 and he/she does not have a Living Trust, the estate is going to pay approximately $33,000 in probate fees and it’s going to take approximately 9 months in the probate court to transfer the house into the daughter’s name or give legal rights to the daughter to sell the house. Planning for Disability A Living Trust can accommodate disability. If all your client has is a Will, and if he/she becomes disabled, then the court would have to appoint a conservator to take care of the disabled person. If a husband and wife have a Will but no Living Trust, and the husband has dementia and the wife asks you to sell their house for them so that she can use the proceeds to take care of her husband, court action is going to be required and that may take a long time. In this situation, they cannot sell the house because the husband with dementia does not have the required capacity to sign your contract or escrow paperwork. In order to sell the house, the court would need to appoint a conservator over the husband. Getting the court involved in their personal life to determine mental capacity could be embarrassing to them. However, if they have a Living Trust, the Living Trust normally already has a financial power of attorney built in so that it can handle this type of situation and avoids having to get the court involved. The avoidance of a conversatorship is a significant benefit in having a Living Trust. Ensuring Confidentiality Another important advantage of a Living Trust is that it gives your clients privacy. Whatever assets they own are private to the world. But if they have only a Will, that Will is going to become public to the world because that Will is going to be admitted to the probate court. Court records are always public records. Advantages Outweigh the Cost It is usually less expensive to draft a Will. A Living Trust costs more because it is an integrated estate planning tool. In a Living Trust, your clients can designate: (1) who gets their assets and, (2) when they get these assets and, (3) put in conditions and criteria specifying when someone is to get any asset (such as “you must go to college to collect a certain sum of money”). For example, if you client only has a Will and if your client's estate is worth $1 million dollars and they have an eighteen year old son; when they die, their eighteen year-old son is going to inherit the $1 million immediately. The eighteen year old son might spend all the money relatively quickly. But, if they have a Living Trust, they can control when and how he gets the money, including specifying that he must go to college first. A Living Trust is Best for Most People: For people with assets over $150,000, the benefits of avoiding probate, avoiding conservatorship, ensuring privacy, and being able to specifically control the manner of distribution of those assets are well worth the extra cost of creating a Living Trust.


Question: When is Probate Necessary? Answer: A frequent question that real estate agents and heirs ask me: “Is probate really necessary?” The reason they ask the probate attorney this question is because they have heard that a probate is very expensive and time consuming. How expensive and time consuming is it? If a house gross value is $500,000, then the total cost of probate will be approximately $29,000 and it takes about one year to complete the probate court process.

No heirs really want to go through a probate. This article will give a brief summary elucidating when a probate is necessary in California. Probate is a title clearing process. If you own a house in California and you die without a living trust, your heirs or beneficiaries will have to engage the probate court to transfer the title out of your name into theirs. The magical threshold amount is $150,000. In general, if you die and your estate gross value is more than $150,000 then a probate is necessary. However, if a house is titled under joint tenancy or community property with right of survivorship, then a probate is only necessary upon the death of the surviving joint tenant or the surviving spouse. If you have cash that is more than $150,000 held in a pay on death account then a probate is not necessary because you have a contractual agreement with the bank to give that money to the designated “beneficiary” upon your death. If your children are to receive one million dollars in life insurance proceeds, then no probate is necessary because there is a designated beneficiary in place. If you own real property with value that is less than $150,000 and you don’t have a living trust then no probate is necessary but some court involvement is necessary. If the real property value is $50,000 or less then you have to file a form called “Affidavit RE Real Property of Small Value” (Probate Code 13200). However, if the real property value is more than $50,000 but less than $150,000 then you have to file a form called “Petition to Determine Succession to Real Property”. With both of these forms, you must get a probate referee to value the real property. If the value of the house is more than $150,000 and you do not have a living trust then a probate is needed. However, from time to time, a married person or a domestic partner may have his or her name on the grant deed alone. The surviving spouse name is not on the grant deed. Is a probate necessary when that spouse or domestic partner whose sole name is on the grant deed dies? I have many surviving spouses and domestic partners tell me that they have been married for many years and for one reason or another the house is titled only under that deceased spouse’s name. The answer as to whether a probate is needed or not hinges on the concept of community property and California Probate Code Section 13500-13660. California is a community property state and a house that is bought using community money is considered community property. Thus, if a married person bought a house after he or she got married using community funds, there is a presumption that the house is a community house. California Probate Codes 13500- 13660 allow property of any value passing to a surviving spouse without a probate. Therefore, if a married person bought a house after marriage using community funds under his or her sole name on the grant deed then a probate is not necessary but instead the probate attorney will file a formcalled “Spousal Property Petition.” This form is very useful because California law allows the house to pass to the surviving spouse or domestic partner without a need for a formal, expensive and lengthy probate.


 

                                                        SALE OF PROPERTY AND DISTRIBUTIONS

Disposition of Real Estate - Title Issues in Probate

Probate Code §10308 provides that all sales of real property, whether by private sale or public auction, shall be with court confirmation unless the personal representative has been granted full authority under the Independent Administration of Estate Act (IAEA) as outlined in Probate Code §10500 to 10538. The most common way of selling real estate in probate cases is through real estate agents.

Probate Code §10538 allows the personal representative to execute an exclusive right to sell real estate for a period of up to 90 days and grants each extension of 90 days but not to exceed 270 days (if necessary). Most REALTORS will use their California Association of Realtors form called the "Probate Listing Agreement" (Exhibit 1) as the real estate contract for the personal representative to sign. If your client is the surviving spouse and adult children want to sell the primary residence, keep in mind the probate homestead. Probate Code §6521 could prevent the sale of the primary residence if the surviving spouse or minor children petition the court that they need the primary residence to live in. Even though the real property is being sold, it is important to remember to always have adequate insurance for the real property at all times until escrow closes and the buyers will have their own home insurance.

If the personal representative has been granted full authority under the Independent Administration of Estate Act then he or she could open escrow with the accepted offer. In accordance with Probate Code §10580, the personal representative will provide the heirs with a copy of a "Notice of Proposed Action" form DE-165 (Exhibit 2) , which declares that the personal representative intends to sell the real property and provides the terms and conditions of the proposed sale. The heirs have 15 days to object to the proposed sale and, if they do not object, the sale may proceed. The court is not involved in the sale therefore, no court confirmation is needed. If for some reason the estate wants to close escrow immediately and not have to wait for the 15 days, then a "Waiver of Notice of Proposed Action" (Exhibit 3) needs to be signed by all heirs. Because the personal representative has been granted full authority under the Independent Administration of Estate Act, he or she can sell the real property at any price and is not subjected to selling it for at least 90% of the appraisal value as outlined in Probate Code §10309(a)(3).

If the personal representative is granted only limited authority under the Independent Administration of Estate Act, then the sale procedure is significantly more complicated. The personal representative must publish a notice relating to the sale in a local newspaper of general circulation in the city where the decedent resided, then accept an offer, then file the "Report of Sale and Petition for Order Confirming Sale of Real Property (Exhibit 4) and attend the court confirmation hearing where the sale will be subject to "overbids". The overbid process is similar to an auction, where any individual may come forward and attempt to outbid the original proposed purchaser. Notice of sale must be published in the following manner: 1) at least three times over a period of no less than 10 days before the sale, the third time being at least 5 days after the first and in a newspaper published at least weekly in the county in which all or some of the land lies or, if there is no such newspaper, in the newspaper that the court or judge directs in accordance with Probate Code §10300(a). Probate Code §10311(a)(1) gives the computation on the overbidding formula, which is 10% percent of the first $10,000 and 5% of the remaining balance. For example, for a $500,000 accepted offer, the first overbidding amount would be $525,500 (10% of $10,000 + 5% of $490,000 + $500,000 = $525,500).

The appraisal of real property on the original inventory is based on its value at the date of death. If the personal representative has limited authority under the Independent Administration of Estate Act and the real property is being sold more than one year after the original appraisal date and court confirmation is needed, then the court will require a reappraisal before the court confirmation can go through. The reappraisal is necessary because of market fluctuation during the previous 12 months and the reappraised value determines the minimum acceptable price for the property because the sale price (by law)  has to be at least 90% of its appraisal value.

Upon completion of the court confirmation, the court will issue an "Order Confirming Sale of Real Property" confirming the sale to the buyer making the highest offer. The personal representative will submit a certified copy of this order to the title company or escrow company so that escrow can be closed.

It is highly recommended that any and all title issues are resolved prior to the sale of any real estate in a probate. It is imperative to work with a good title company and real estate agent to resolve any preliminary title problems.

Retirement Plans and IRA Distributions

Assets in a retirement plan that has a designated beneficiary are not subject to probate. The attorney or the personal representative should request a copy of the plan document and any beneficiary designation on file to determine whether the retirement plan will be part of the probate because if the benefits of a retirement plan are payable to the estate then they are subject to the probate administration. Money from IRAs, Keoghs, and 401(k) accounts automatically transfers to the persons named as beneficiaries, thus they are not part of the probate administration.

Life Insurance and Other Beneficiary Designations and Accounts

The personal representative and the probate attorney should review all insurance policies to ascertain who is the designated beneficiary because unless the name of the designated beneficiary is the estate or there is a community property interest in the proceeds, then the designated beneficiary will collect the proceeds without the need of a probate administration. Life insurance is considered a non-probate asset because the court sees it as a contract between the decedent and the insurance company, where the decedent pays the premium and the insurance company promises to pay the designated beneficiary upon death.  Probate Code §5000 allows a person to make a provision in a written instrument (such a life insurance contract) directing a non-probate transfer on death that will be valid even if that instrument does not comply with the formalities for signing a will. Other assets, which are contractual in nature and payable to the designated beneficiary, are: joint-tenancy account, pay-on-death accounts, transfer-on-death accounts, trusts, and other written instruments of a similar nature. If the surviving spouse is not the named designated beneficiary then the attorney should determine whether community funds were used to pay the premium.

Preliminary and Final Distributions

Normally the heirs will get their inheritance in a probate case ONLY after the judge has signed an order approving the "Final Petition for Distribution" (Exhibit 5). There is a court hearing date for this "Final Petition for Distribution." The "Final Accounting" of all the assets, cash balances, any gain or loss, and administrative expenses are accounted for. A good practice is to have the heirs waive the accounting detail because the accounting requires a significant amount of work. The "Final Petition for Distribution" is essentially a recap or a summary of what happened in the probate case in terms of 1) which assets are still in the estate, 2) which assets were sold and 3) which creditors were paid. The heirs cannot access their money until the judge approves it. It is not uncommon for the heirs to want an early distribution because most probate cases will take about one year and the heirs may need an early distribution of their inheritance.

Probate Code §11620 states that "A petition for an order for preliminary distribution of all, or a portion of, the share of a decedent's estate to which a beneficiary is entitled may not be filed unless at least two months have lapsed after letters are first issued to a general personal representative." Probate Code §11623 states that if the court grants the estate to act under the Independent Administration of Estate Act (IAEA) then the estate may permit preliminary distribution of up to 50% of the net value of an estate. Probate Code §10520(c) provides that the personal representative may make a preliminary distribution of cash not to exceed $10,000 to any one person. Thus, it is always a good idea to check the box on page one of the Probate Petition form asking for the authority to act under IAEA. Although you can petition for an early distribution after the issuance of Letters, it is recommended that you file the Inventory and Appraisal form first with the court so that the judge can better assess the financial situation of the estate.

Receipts are required from all beneficiaries for any distribution made. Always obtain receipts in advance of distributions because the heirs might not be as responsive to your request once they have received the money. The court will not allow the probate case to be closed unless the beneficiaries who  have received the estate’s assets have signed the receipts. The only exception to this rule is when the personal representative is the sole beneficiary of the estate. One of the issues in probate is how to distribute personal property. Sometimes the sentimental value of the personal properties out weights the monetary value. There might be beneficiaries fighting over who get the sentimental coffee cup. The easiest way to resolve that is to have a public auction with everyone invited to participate and then divide the proceeds.

It should be noted that Probate Code §1202 allows "any interested person for good cause shown on the record to cite the personal representative to appear before the court and explain the condition of the estate and the reasons why the estate cannot be distributed and closed". This is useful for creditors and those who have lent money to the heirs.

Once the "Petition for Final Account & Distribution" hearing is heard and the judge approves it, an "Order Settling Final Account and Final Distribution" must be submitted for the judge's signature. Probate Code §11603 expressly requires that the order containing the following "the names of the distributees and the share to which each is entitled". If real property is part of the distribution, then it is recommended that the personal representative file a copy of the recorded judgment with the county recorder. Probate Code §11642 states that if assets are discovered after the court has signed the order for final distribution then the "distribution shall be made as provided in the order", if you have an omnibus clause ("Final distribution of the estate of the decedent in Petitioner's name all other property of the decedent or of the estate, whether not now known or hereafter discovered") then the distribution would be made per that clause.

Calculating Augmented Estate and Spousal Elective Share

Augmented estate is a concept that is applicable to the non-community property states. Probate Code §13502 and 13503 allow the surviving spouse or registered domestic partner to elect to probate all or part of the decedent's estate, as well as to submit the survivor's one-half of the community property to probate administration. Why might a surviving spouse elect to probate his or her one-half of the community property? If the decedent was in a high risk profession, such a doctor or lawyer, the exposure of malpractice claim could linger. Therefore, if the assets were part of the probate administration, then potential claimants would then be confined by the restrictions applicable to creditors in a probate, such as if a creditor's claim was not filed within the required four months period, that claim could be waived. The personal representative may request that certain decedent's assets that will pass to the surviving spouse or registered domestic partner be administered as part of the probate estate.

Exhibit 6 is an example that I did for a case in Riverside, California, where the surviving spouse filed a written election with the probate court.

The surviving spouse or surviving registered domestic partner may elect to have all or a portion of the following property be part of the probate administration: 1) the decedent's one-half of the community property; 2) the decedent's one-half of the quasi-community property; and 3) the decedent's separate property.

Dealing with the Surviving Family Members and Other Beneficiaries

The estate attorney usually deals with bereaved clients who are unfamiliar with the probate process at a time when emotions are tumultuous; therefore, the attorney should use the clearest language possible when discussing the probate matters. A very important concept to keep in mind is that ONLY the personal representative is the client. Too often, other family and beneficiaries will call the probate attorney and it is imperative that the probate attorney makes it clear that he or she is only the attorney for the personal representative. It is vital that the probate attorney advise them to seek their own counsel because when conflicts arise between beneficiaries, the personal representative's attorney's duties lie with the personal representative. The probate attorney and the personal representative duties are to act out the wishes of the decedent and do what is best in the interest of the estate.

Solving the Problem of Liquidity

An estate that is solvent but not liquid may have trouble paying charges against the estate. This can happen when the condition of the estate is such that there are sufficient assets to meet all charges, but no available cash to pay the debts and expenses of administration. Typically, the estate would need to liquidate, sell, or dispose of some or all of the estate property to establish the funds necessary to pay those debts. Probate Code §10000 states that "the personal representative may sell real or personal property of the estate where the sale is necessary to pay debts, where the sale is to the advantage of the estate, where the Will directed the property to be sold or where the authority is given in the Will to sell the property". Normally, the personal representative would petition the court for full authority under the Independent Administration of Estate Act (IAEA) where he or she would not need court confirmation or court supervision for sale of most properties. The personal representative may also try to offer any willing creditors a lien against the house, if amicable, or personal representative may elect to borrow against the estate to pay administrative expenses such as funeral and burial cost. Alternatively, the decedent may seek to buy life insurance in anticipation of an illiquid estate.

Distributions to Trusts

Distributions to existing trusts are handled very much like distribution to any beneficiaries. The trustee of the trust will sign a receipt for the distribution. The final order contains the trustee's name, statement of acceptance of the office of trustee by the named trustee, all operative terms for the trust, all pertinent clauses, the appropriate language necessary to transfer the assets to the named trust and the trust tax identification number.

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                                                           INVENTORY AND APPRAISEMENT

Every probate case must file an "Inventory and Appraisal" form DE-160 (Exhibit 1) with the court. Probate Code §8800 states that the personal representative must file this form with the court within four months after form DE-150 known as "Letters" (Exhibit 2) is first issued by the court. In practice, the probate attorney fills out the "Inventory and Appraisal" form, gets the personal representative to sign it, sends it to the probate referee to value the assets listed on that form, and then the probate attorney files this form with the court after the probate referee signs off on it. The inventory items listed on that form are assets that are subject to the probate administration. The personal representative signs under a penalty of perjury that the Inventory and Appraisal form is correct. If the personal representative refuses or negligently fails to file an Inventory and Appraisal form within the time allowed, upon petition of an interested person, the court may (1) compel the personal representative or  (2) remove the personal representative from office and\or (3) impose on the personal representative personal liability for injury to the estate (or to an interested person) that directly results from that refusal or failure. The probate attorney for the personal representative has a duty to handle the matter "diligently" and an independent duty to ascertain the assets of the estate. If the probate attorney suspects that the client's work is inaccurate, misleading or incomplete, the attorney must conduct an independent investigation (Butler v. State Bar 42 C3d 323 1986). It is important to keep in mind that all assets listed in the Inventory and Appraisal form will have to be accounted for in the Final Accounting and Petition for Final Distribution. If an individual asset has been sold and is represented by cash at the close of probate, the personal representative must account for any gain or loss. The gain or loss is the difference between the value on the Inventory and Appraisal form and the ultimate selling price. The attorney and the personal representative's statutory fees are based on the Inventory and Appraisal form but the gain or loss will either increase these fees or decrease them. In effect, the Inventory and Appraisal form is very important and provides a checklist for preparing the final accounting to close out the probate case, the attorney and personal representative's fees, and estate tax implication.

Locating Insurance Policies, Deeds and Other Ownership Documents

The probate attorney will be the one to fill out the Inventory and Appraisal form, therefore, he or she will need to know what are the estate's assets. During the initial consultation, the probate attorney should ask the proposed personal representative to bring decedent's bank statements, brokerage statements, any promissory notes, grant deeds or quit claim deeds, or trust transfer deed, insurance policies, recent tax returns and any other documents that may be helpful in determining what assets should go on to the Inventory and Appraisal form. Although it is true that the Inventory and Appraisal form is not due until four months after Letters is issued, the probate attorney needs an estimated estate's value to put on the initial probate petition. Most of the time, in the usual probate case where the last surviving parent died and the only asset is the primary family house. I would recommend pulling the grant deed or the quit claim deed to prove to yourself that the only reason why we are doing this probate is because the only asset is the house; therefore, let's make sure the deceased parent's name is on that deed. You can easily contact a title company to pull those deeds for you. If there is any doubt or question about any securities, then contacting the decedent's broker would be a good place to start in terms of locating stocks held by the decedent. For evidence of insurance, a good place to start is to contact the insurance agents with whom the decedent had dealings with in the past. The tax return (Form 1040) is a good document to locate financial assets because Schedule B will list all interest and dividend income, which would lead to the decedent's saving accounts or brokerage accounts where stocks are held. Schedule A of the 1040 will list the mortgage interest and property tax paid on the primary residence. Schedule E of the 1040 will list the mortgage interest paid on any rental properties. Schedule D of the 1040 will list any K-1 showing business ownership of any LLCs or S-corporation.  In these days of modern technology, the personal representative might need to review the decedent's personal computer for any online banking or assets because banks may not be sending out bank statements if the decedent opted into a "paperless" system.  Probate Code §8870 does allow special discovery procedures whereby the personal representative may ask the court to issue a citation to drag a person who is believed to have "wrongfully taken, concealed or disposed of property in the estate of the decedent".  Probate Code §8870(c) states that "Disobedience of a citation issued pursuant to this section may be punished as a contempt of the court issuing the citation" and as we all know, being held in contempt of the court might lead to incarceration. Furthermore, Probate Code §859 puts some financial muscle into it, stating "If a court finds that a person has in bad faith wrongfully taken, concealed, or disposed of property belonging to the estate of a decedent, that person shall be liable for twice of the value of the property".

Obtaining a Tax ID and Marshaling Property

The estate is an income tax entity that is separate from the decedent and separate from the personal representative; therefore, an estate's tax identification number is required. The probate attorney can easily obtain the estate's tax identification number by logging onto the IRS website and filling out an SS-4 online (www.IRS.gov/businesses). This online procedure will give the estate a tax identification number instantly. In most probates, the heirs will be selling the estate's primary residence; therefore, the probate attorney would want to make sure that escrow processes the transaction with the estate's tax identification number so that the personal representative does not get hit with a 1099 on a personal level. The attorney and the personal representative should understand the terms of the Will, if any, and marshal the estate's assets in accordance with the terms of the Will and in the best interest of the estate's heirs. It is the duty of the personal representative to gather and safeguard the estate's assets.

The Inventory and Appraisal form contains the values of the assets left by the decedent; therefore, the IRS will use the listed probate assets as well as the decedent's non-probate assets in reviewing an applicable estate tax return. Occasionally, an asset that the decedent owned at death will be in the possession of someone who does want to return it to the personal representative. Because the decedent owned the asset at death, it is usually a probate asset. In order to marshal the asset, the personal representative should file a petition which requests the court to determine that the asset belongs to the estate and order the person in possession of the asset to return it to the personal representative (Probate Code §850). This is sometimes refered to as a Heggstad Petition or an 850 Petition. A decedent may die owning an asset which would require the personal representative to spend more money to collect, marshal, maintain and safeguard the asset than the asset is worth. Probate Code §9780 authorizes the personal representative to abandon the property under those circumstances unless it is specifically devised to a beneficiary under the decedent's Will. A decedent's will may leave Bank of America saving account No. 456789 to Mary Smith but if the decedent does not own that account when she dies, the bequest to Mary Smith lapses because of a concept known as ademption (Probate Code §21135). The law presumes the decedent changes her mind about leaving that account to Mary Smith, otherwise, the decedent would have maintained that account.

Probate Property vs. Non-Probate Assets

The Inventory and Appraisal form lists only assets that are subject to the probate administration. Basically, any assets titled under the decedent's name will be probated.  The assets in the majority of the probate cases are the primary residence, bank accounts, household personal property, and vehicles. There may be assets that are not subject to the probate administration. These assets are excluded from the Inventory and Appraisal form. Some of the common non-probate assets are:

  1. Joint tenancy -- When one of the joint tenants dies, the property held in joint tenancy passes by operation of law to the surviving joint tenant and, therefore, is not subject to the probate administration. The deed to the real property needs to be in accordance with language of Civil Code §683 containing the words "as joint tenant" or "in joint tenancy".
  2. Life estate -- A decedent may have a life estate in real property that ends on his or her death and accordingly possession of the real property vests in the remainder holder or reverts to the grantor. Civil Code §780.
  3. Insurance proceeds or a retirement account payable to a designated beneficiary -- The named beneficiary of a life insurance policy is entitled to the proceeds of such policy by virtue of being the designated beneficiary and thus avoids probate.
  4. Totten trust account ("in trust for" accounts) -- A Totten trust account is an account in the name of one or more parties as trustees for one or more beneficiaries established by the deposit agreement with the financial institutions.
  5. Pay on death accounts (POD) -- A pay on death bank account is an account payable to one whom the account is payable on request after the death of the depositor.
  6. Trust Property -- Property titled in the name of the decedent's revocable trust will not be subject to probate administration. Probate Code §13050(a)(1).
  7. Out of state real property (needs an ancillary probate in the state in which the property is located). If out of state real properties are titled in a trust, then no ancillary probate is needed.
  8. All properties passing to the surviving spouse avoid probate but rather pass through a procedure known as a spousal petition -- Probate Code §13650

Preparing the Inventory and Appraisal Forms

The Inventory and Appraisal form will list each item of the property separately with the fair market value of each as of the time of the decedent’s death in monetary terms. Generally, the fair market value of an asset at the date of death is the value used in probate cases but the alternate valuation date can be used for federal estate tax purposes. In a conservatorship estate it is the date of the appointment. It will list in two separate attachments: Attachment 1 and Attachment 2. Attachment 1 will be appraised by the personal representative. Probate Code §8901 allows the personal representative to appraise the following items that are listed in Attachment 1: cash, money orders, checks issued to decedent for wages earned as of the date of death, checking and saving accounts at financial institutions, money market accounts, and other items that can be readily appraised by the personal representative. Attachment 2 will list items that will be appraised by the probate referee such as real property, business interest, vehicle, promissory notes, securities, saving bonds, insurance policies, patent, trademarks, copyrights, licenses, franchises, leases, royalty interests, and other items that cannot be readily appraised by the personal representative.  Probate Code 8940 states that the probate referee must "promptly and with reasonable diligence" appraise the property listed on Attachment 2 not later than 60 days after delivery of the inventory by the personal representative. Probate Code 8940(b)(2) states that the Inventory and Appraisal form must be delivered to the personal representative and filed with the court. In practice, the probate referee mails the Inventory & Appraisal form back to the probate attorney who in turn makes sure that the personal representative's signature is on it and files it with the court. Probate Code 8800(b) mandates that the Inventory and Appraisal form "shall be filed within four months after Letters are first issued to the personal representative", therefore, it is imperative to get the probate referee appointed to your probate case promptly because the four month deadline is pending. It is important to distinguish that the Inventory and Appraisal form is due four months from date of Letters issued not four months after the date of appointment of the probate referee.  If for some reason the probate attorney cannot file the Inventory and & Appraisal form on time, Probate Code §8804(c) states "the personal representative may file partial inventories and appraisal where appropriate under the circumstances."

Should the personal representative learn of any assets that should be administered in the decedent's estate and which are not included in a prior Inventory and Appraisal form, the personal representative shall file a supplemental Inventory and Appraisal form in the same manner as the original Inventory and Appraisal. The supplemental Inventory and Appraisal shall be filed within four months after the personal representative acquired knowledge of the property (Probate Code §8801).

Probate Code §8906(a) allows an interested person "at any time before the hearing on the petition for final distribution of the estate to object to the inventory"; the objecting party has the burden of proof under Probate Code §8906(d).

On page 1 of the Inventory and Appraisal form the probate attorney signs off on whether the bond is sufficient or insufficient in accordance with California Rules of Court 7.204. This rule puts the responsibility squarely on the probate attorney to make sure there is a bond increase, if necessary, and it is important that the probate attorney does this because he might be liable for any loss to the estate if the personal representative absconds with the assets. A good point to remember is whether the personal representative is bondable or not.

Keep in mind that Probate Code §1250 states that once an interested party files a form called "Request for Special Notice", form GC-035, that interested party is entitled to receive a copy of the Inventory and Appraisal form as well as other forms filed with the court.

Concurrent with filing the Inventory and Appraisal form, the personal representative must also file a certification that the requirements of California's Revenue and Taxation Code §480 either (1) are not applicable because the decedent owned no real property in California at the time of death, or (2) have been satisfied by the filing of a change of ownership statement with the county recorder or assessor of each county in California in which the decedent owned real property at the time of death (Probate Code §8800(d)). The probate attorney should also make sure all filings are in accordance with Proposition 58 (Exhibit 3) and 193 if real property is passing from parent to child, or grandparent to grandchild, by filing a claim form for exclusion from property tax reassessment.

Below are some preparation tips taken from the California Probate Referees Association:

  1. Number each item
  2. Triple space between items
  3. Group common items together -- all real property organized by county; all securities in alphabetical order; all bonds by issue date
  4. State whether the interest in the property is separate, community or quasi-community and whether the interest is 100%, 50%, or some other fraction.
  5. Number the pages of the attachment

Dealing with the Probate Referee

The Judicial Council form Order for Probate (Form DE-140) has a box to be checked if the personal representative and the probate attorney seek the appointment of a probate referee. If the county has more than one probate referee, they are appointed on a rotating basis, usually at the time the signed Order for Probate is filed. If you are doing a probate in Orange County, California, once the judge signs the Order for Probate then a probate referee will be automatically assigned to your case (Exhibit 4).  If you are doing a probate in Los Angeles, California, you will have to file an "Application and Order Appointing Probate Referee" (Exhibit 5) and the judge will routinely sign off on it and assign a probate referee for your case. The personal representative may challenge the appointment of the probate referee first designated by the court by filing an affidavit or declaration under penalty of perjury with the court and mailing a copy to the referee before the inventory is submitted to the probate referee. Probate Code §8924 allows the judge to remove a probate referee in the following circumstances: 1) A showing of cause, including incompetence or delay, made by the personal representative in a petition on notice hearing, that in the opinion of the court warrants removal, 2) a challenge as described above, or 3) any other causes provided by statute. Probate Code §8924 allows the judge to appoint a new probate referee upon removal of the old probate referee. Probate Code §8924 allows for the Waiver of Appraisal by a referee on notice hearing, however, a 15 day notice must be given to all persons listed in Probate Code §1220, which lists each known heirs, the probate referee and all other interested parties. Probate Code §8904 provides that the personal representative may elect to have an independent appraisal for any unique, artistic, unusual or special item of tangible personal property. The personal representative makes the election by making a notation on the Inventory and Appraisal form delivered to the probate referee indicating the property to appraised independently. The probate referee may, within five days after delivery of the Inventory and Appraisal, petition the court for a determination whether the property in question for such treatment is appropriate. Probate Code §8904 provides for an award of litigation expenses, including reasonable attorney fees, against the referee if the petition fails. The probate referees are not employees of the court but independent contractors, whose compensation for the appraisal is based on the value of the asset appraised. The referee's fee is one-tenth of one percent of the total value of the assets appraised, along with reimbursement for actual and necessary expenses. Probate Code §8963 sets the minimum fee at $75, and the maximum fee at $10,000. It is helpful to refer to "The Probate Referee Guide" prepared by the California Probate Referee's Association (www.ProbateReferees.net), which provides in great detail the information that a probate referee will need to complete valuation of the assets listed on Attachment 2.

Managing Decedent's Assets During Probate

The personal representative has the duty to manage and control the estate assets. This duty includes, but is not limited to, the duty to verify that assets are insured and all cash is in a federally insured interest-bearing accounts (Probate Code §1064(a)(5)). The personal representative should deposit any cash in a financial institution in this state under the estate's tax identification number. The FDIC limit is currently $250,000 per institution. Accordingly, if a personal representative has more than $250,000 in any single bank, even if it is in multiple accounts at the bank, those assets are not completely insured and the personal representative is breaching his/her duty under Probate Code §9700. Therefore, it is not uncommon for the personal representative to open multiple estate accounts at different institutions. As a general rule, it is not a good idea to invest the estate's cash in new investments because those assets will most likely need to be sold to pay administrative expense, such as the probate attorney's fees and to distribute the cash to the heirs at the end of the probate proceeding.

Handling Common Valuation Issues

If the personal representative or the probate attorney disagrees with the valuation by the probate referee then a conversation with the probate referee is recommended. For instance, for real property, most probate referees do not enter the house to do the valuation. Therefore, it is a good idea to take photos inside the house and show them to the probate referee with notation of what is wrong with the interior of the house. For example: a cracked foundation or mold or if the decedent was a hoarder and the house is a bad condition. If a valuation agreement cannot be reached then file an objection with the court.

When to Hire a Valuation Specialist or Appraiser

The probate attorney might consider hiring a valuation specialist or appraiser if the estate is substantial and to value closely held stock or business interest or real property that is difficult to appraise when there are no comparable values. Probate Code §8904 states that "a unique, artistic, unusual, or special item of tangible personal property that would otherwise be appraised by the probate referee may, at the election of the personal representative, be appraised by an independent expert qualified to appraise the item".

________________________________________________________________________________

Question: Probate Creditors - How Are They Handled?

 Answer: One of the primary reasons why

beneficiaries open a probate is to collect the assets that are rightfully theirs. However, California Probate Code §7001 also requires that the decedent's debt be paid. I am a California probate attorney, I will summarize what the personal representatives and the creditors must do in order to protect their interests in the probate process. Below is a general checklist of what a probate attorney must do on behalf of the personal representative in handling creditors' claims in probate, after the probate petition is filed:

1) The "Notice of Petition to Administer Estate" must be published in the newspaper,

2) File the "Proof of Publication" with the probate court,

3) The personal representative must take steps to determine "reasonable ascertainable creditors",

4) Send "Notice of Administration to Creditor" within four months after issuance of "Letters" to known or reasonably ascertainable creditors or 30 days after the personal representative first has knowledge of the creditors, whichever is later and

5) Notify the State Director of Health Services, Director of Victim Compensation and Franchise Tax Board within 90 days of the issuance of Letters.

Once a creditor files a claim, the personal representative must either allow or reject the claim, serve a copy of the allowance or rejection on the creditor and the creditor's attorney; and file a copy of the allowance or rejection with the proof of service with the probate court. If the personal representative allows a claim then that debt must be paid during the course of the probate administration.

 


 Question: How does the son or daughter identify the deceased parent's creditors?

Answer: Sometimes the personal representatives (sons or daughters) will not know what debt their parents owe; thus, making it difficult to give notice to the creditors. Here is a checklist to help the personal representative identify potential creditors:

1) Look for regular payments going to a particular payee,

2) Review the decedent's tax return for interest paid,

3) Creditors sending letters demanding payments from the decedent

4) Hospitals or care facilities, doctors, or nursing agencies where the decedent received treatment before decedent's death,

5) Ambulance companies,

6) Gardener, cook, accountants, housekeeper, etc.

7) Utility company

8) Credit card companies

9) Check the county recorder for any lien recorded against the decedent


Question: When should a creditor file his or her claim in the probate court?

 Answer: Creditors should be aware of the "Drop-Dead"

one year statute of limitation rule. Under CCP § 366.2, creditors have one year to collect their debts from a person who dies. As the "baby boomers" age, this will become an issue for creditors to deal with because this is a strict one year after the date of the debtor's death. Creditors cannot file their claims unless a probate case is open. The clerk at the court will not accept the claim because the probate case does not exist. Therefore, in certain circumstances, a creditor may need to open a probate to collect the debt. Creditors are entitled to petition for probate and should do so if the anniversary of the decedent's death is approaching and it appears that no beneficiaries will initiate the probate proceeding.


Question: Why does every probate case require an appraisal on the decedent's house?

Answer: California Probate Codes §8802 to 8980 dictate that the personal representative must file an "Inventory and Appraisal" form with the court. As a matter of fact, California court has a mandatory judicial form that the personal representative (PR) must fill out that lists all of the decedent's personal property and real property.   This form is normally filled out by the probate attorney, signed by the  PR, and the probate referee who valued the decedent's house.  Every probate case needs a probate referee to value the decedent's house. The "Inventory and Appraisal" form must be filed with the probate court within four months after the PR has received a form called "Letters".  In Los Angeles county, once "Letters" is issued, the probate attorney will submit an application to have the probate court appoint a probate referee to the probate case. 

Once the court has appointed a probate referee to the case, the probate attorney will fill out the "Inventory and Appraisal" form to submit to the probate referee. The probate referee has 60 days to value the decedent's house and return the form back to the probate attorney. Once the form is returned and the PR has signed the form, then the probate attorney will file it with the court.

The inventory and value of the decedent's property are important for the following reasons: 1) the beneficiaries will be apprised of what assets they are getting, 2) the creditors will know what assets are available to satisfy their claims, 3) if a bond is required, the value will tell the court the amount of bond, 4) the IRS will use the values listed in the "Inventory and Appraisal" form to aid their review for estate tax purposes, 5) the basis of the fees for the PR, probate referee and the probate attorney are based on the value listed on the "Inventory and Appraisal" form, and 6) if it is a limited authority case then the sale of the house must be at least 90% of the appraised value.


Question: What is the "90% Rule" in selling a house in probate?

Answer: If the personal representative has limited authority, then the sale of the house must be least 90% of the appraised value of the house. This is because all limited authority cases that have a house for sale must pass through the court confirmation process. The probate court will not allow the sale of a house to go through if the sale price is not at least 90% of the appraised value that appears on the "Inventory and Appraisal" form. As a probate attorney, I always try to get my clients full authority to sell the estates' houses so that they can by-pass the court confirmation process because many buyers like full authority and thus, ultimately yielding a higher sale price for the estate.


Question: I am representing a buyer in a probate transaction. What do I need to do to protect my buyer?   

Answer: You need to ask the listing agent for a form called "Letters". In that form you will see whether the personal representative has full or limited authority.  It is crucial to know what power the court has granted the seller. If it is "full authority" then your buyer's offer will not be subjected to court confirmation, a big advantage for your client. If the property is subjected to court confirmation your buyer might lose the house to another buyer in court through a process called the over-bidding.  In a limited authority situation, the seller has accepted your buyer's offer, however, if another buyer shows up in court and is willing to pay a higher price then your buyer will not get the house.


Question: If I have a probate listing, what type of power should my client ask for?   

Answer:  Always ask for full authority when selling a house in probate. You should ask that the court grants your client full authority under IAEA. If you client is granted full authority, then the sale of the house will not be subject to court confirmation. Because you might get a higher offer for the estate because the buyer knows that his chance of losing the property in court is slimmed once his offer is accepted. In full authority, the selling of real property is not subjected to court confirmation, therefore, there will not be an over-bidder or auction taking place in court. Buyers will pay a higher price for certainty! Some buyers might need to sell their existing homes in order to purchase their next homes. Given all the uncertainties and moving parts in a real estate transaction, it helps to know that once their offer is accepted, and the heirs or beneficiaries do not object to the offer, then the buyer can close escrow in 15 days!


 

Question: Why does every probate case require an appraisal on the decedent's house?

Answer: California Probate Codes §8802 to 8980 dictate that the personal representative must file an "Inventory and Appraisal" form with the court. As a matter of fact, California court has a mandatory judicial form that the personal representative (PR) must fill out that lists all of the decedent's personal property and real property.   This form is normally filled out by the probate attorney, signed by the  PR, and the probate referee who valued the decedent's house.  Every probate case needs a probate referee to value the decedent's house. The "Inventory and Appraisal" form must be filed with the probate court within four months after the PR has received a form called "Letters".  In Los Angeles county, once "Letters" is issued, the probate attorney will submit an application to have the probate court appoint a probate referee to the probate case. 

Once the court has appointed a probate referee to the case, the probate attorney will fill out the "Inventory and Appraisal" form to submit to the probate referee. The probate referee has 60 days to value the decedent's house and return the form back to the probate attorney. Once the form is returned and the PR has signed the form, then the probate attorney will file it with the court.

The inventory and value of the decedent's property are important for the following reasons: 1) the beneficiaries will be apprised of what assets they are getting, 2) the creditors will know what assets are available to satisfy their claims, 3) if a bond is required, the value will tell the court the amount of bond, 4) the IRS will use the values listed in the "Inventory and Appraisal" form to aid their review for estate tax purposes, 5) the basis of the fees for the PR, probate referee and the probate attorney are based on the value listed on the "Inventory and Appraisal" form, and 6) if it is a limited authority case then the sale of the house must be at least 90% of the appraised value.


 

Question: What is the "90% Rule" in selling a house in probate?

Answer: If the personal representative has limited authority, then the sale of the house must be least 90% of the appraised value of the house. This is because all limited authority cases that have a house for sale must pass through the court confirmation process. The probate court will not allow the sale of a house to go through if the sale price is not at least 90% of the appraised value that appears on the "Inventory and Appraisal" form. As a probate attorney, I always try to get my clients full authority to sell the estates' houses so that they can by-pass the court confirmation process because many buyers like full authority and thus, ultimately yielding a higher sale price for the estate.   


Question: I am representing a buyer in a probate transaction. What do I need to do to protect my buyer?   

Answer: You need to ask the listing agent for a form called "Letters". In that form you will see whether the personal representative has full or limited authority.  It is crucial to know what power the court has granted the seller. If it is "full authority" then your buyer's offer will not be subjected to court confirmation, a big advantage for your client. If the property is subjected to court confirmation your buyer might lose the house to another buyer in court through a process called the over-bidding.  In a limited authority situation, the seller has accepted your buyer's offer, however, if another buyer shows up in court and is willing to pay a higher price then your buyer will not get the house.


 

Question: If I have a probate listing, what type of power should my client ask for?   

Answer: Always ask for full authority when selling a house in probate. You should ask that the court grants your client full authority under IAEA. If you client is granted full authority, then the sale of the house will not be subject to court confirmation. Because you might get a higher offer for the estate because the buyer knows that his chance of losing the property in court is slimmed once his offer is accepted. In full authority, the selling of real property is not subjected to court confirmation, therefore, there will not be an over-bidder or auction taking place in court. Buyers will pay a higher price for certainty! Some buyers might need to sell their existing homes in order to purchase their next homes. Given all the uncertainties and moving parts in a real estate transaction, it helps to know that once their offer is accepted, and the heirs or beneficiaries do not object to the offer, then the buyer can close escrow in 15 days!