Basics of Probate
What is Probate?
California probate is nothing more than a title clearing process. The state judge appoints the personal representative, the personal representative collects all the assets, pays all the valid debts from the assets collected and distributes the money to the rightfully heirs. This whole process is supervised by a state judge and usually takes about one year to complete.
Who can be the Personal Representative?
If there is a will naming an individual to be the personal representative then the court will appoint that individual to be the executor of the estate. If there is no will, then the surviving spouse, children, parents, relatives or creditors can petition the court to appointment themselves to be the administrator of the estate. The executor or administrator’s duties are the same. If there is a dispute as to who should be appointed as the personal representative, then the California Probate Code establishes a rule of priority as to who should be appointed.
Which Assets are Subject to Probate?
Not all assets need to go through the probate process in order to pass to the heirs. For example, 401K accounts, IRAs, life insurance and other types of retirement accounts usually do not need to be probated because these types of assets have designated beneficiaries. Likewise, real estate properties that are held as joint tenancy, community property with right of survivorship or held in a living trust do not need to be probated. Once the potential assets that need to be probated are identified and the gross value exceeds $150,000 then a probate is mandatory. If a house is held in the deceased parent’s name then most likely a probate will be needed. If the decedent does not own a home but has cash in the bank exceeding $150,000 then a probate is needed. All assets passing to a surviving spouse do not need to be probated but rather a spousal petition can be filed. A spousal petition process takes about two months, whereas, the probate petition process takes about one year.
Closing the Estate
The probate administration begins when the judge appoints the personal representative (PR), which is signified by the court issuing a form called “Letters”. The PR can now sell the applicable assets (such as the house) to pay off all the debts and taxes. After the estate assets have been appraised and liquidated, the estate can petition the court’s permission to distribute the money to the heirs, pay the personal representative’s fee and the probate attorney’s fee, and file the appropriate paperwork to release the personal representative from any further duties and liabilities.
Heggstad Petition to Avoid Probate
Most homeowners understand that their heirs will not have to deal with the California probate process if their homes are placed in a living trust. One of the main reasons why most homeowners create a living trust is to avoid probate because the probate process is costly and time consuming. When a living trust is created, normally the probate attorney will draft a trust transfer grant deed to transfer the house into the living trust (making the living trust the owner of the house). When the creator of the living trust dies then the children will have the option of selling the house without having to go through the probate process.
However, after creating the living trust, many times, the creators of the trust decide to refinance their home to get a lower interest rate on their mortgages. During the refinancing process, the lenders will require that the title to the home be transferred back into the individual names because the lender wants to legally bind the actual person who is the owner of the house. After the refinancing process is completed, the owner is allowed to transfer title of the home back into the living trust. Unfortunately, after the refinancing is done, the trust creator often forgets to transfer ownership of house back into the trust. Then, when the heirs (children) want to sell the house, the question arises as to whether a probate is necessary since the home was in the living trust before the refinance, but the home is now outside the trust.
The California Court of Appeals has decided the answer in a famous case: The Estate of Heggstad. No probate is needed because California courts now allow an alternate and cheaper court procedure known as the “Heggstad Petition”.
What is a Heggstad Petition?
In 1989, Mr. Heggstad created a revocable living trust and listed all of his real estate in Schedule A of his trust documents. The important language of his trust shows that he intended for all of his property to be part of the trust, as documented in Schedule A of the trust. Mr. Heggstad died about a year later and as the heirs were fighting over the properties, they discovered that a certain piece of real property was not titled in the name of Mr. Heggstad’s trust. The house was mentioned in the trust documents but had not been legally transferred into the trust. The heirs took the case to the California Court of Appeals and the court found that it was sufficient that Mr. Heggstad listed the property in his original trust documents and allowed the heirs to avoid probate on that piece of real property even though a grant deed was never executed transferring the property into the trust. This famous 1993 case stands for the proposition that as long as the trust shows specific written intent that it was the trustor’s wish that the home be part of the trust’s assets, then the court will validate that the home as part of the trust assets and the successor trustee can sell the house without going through the probate process.
This example of refinancing and countless other situations where the trust creators inadvertently left the house out of the trust happened so frequently that the problem was finally addressed by the California lawmakers in Probate Code Section 850. This California Probate Code Section 850 allows the transfer of real property into a revocable trust after the death of the trust creator where title to such real property was not properly titled in the name of the trust before a person’s death. (The Heggstad situation)
The Heggstad Petition is a very powerful tool to avoid probate. But do not make the mistake of thinking that it is not necessary or imperative to change the title vesting to the name of the living trust. Having to use the Heggstad Petition will delay the selling of the house because it requires a court hearing, not to mention the attorney fees that could have been easily avoided by simply remembering to change the title of the home back into the living trust after the refinancing is completed.
How to Avoid Property Tax Reassessment
This article explains four ways of avoiding property tax reassessments that every homeowner in California should know. The property tax rate imposed on California homeowners is equal to 1% to 1.25% of the property’s assessed value at the time of purchase. The assessed value is equal to the current market value of the property as of the date there is a change in ownership, plus a yearly increase in value based on inflation. Proposition 13 mandates that the yearly increase does not exceed 2% of the previous year’s value. However, keep in mind that assessed value may also increase upon completion of new construction and that is why building permits trigger the tax assessor’s interest. The key to avoiding property tax increases is to avoid a change in ownership. But, if you have to transfer ownership or sell the property, then make sure your transfer or sale qualify for one of the following exclusions. Or, if you are inheriting a home from your parent, you want to make sure you take full advantage of certain exclusions to retain your parent’s low property tax basis. We will examine four very important exclusions: Propositions 58, 193, 60 and 90. These exclusions, if utilized properly, will save thousands of dollars in property tax bills annually.
Proposition 58 - Transfer between Parent and Child
It is common that a deceased parent may have bought a home 30 years ago for $100,000 then, 30 years later, when the parent dies the child receives a $1,000,000 home. Does the child pay the property tax based on the original $100,000 assessment or on the current value of $1,000,000? Proposition 58 allows the child to retain the old property tax basis of $100,000! This is of huge importance because it represents thousands of dollars in savings in property taxes each year. The following are the important requirements of Proposition 58:
- The person doing the transfer, who can only be the parent or the child, must own the home. Either the parent owns the home and is giving it to the child or the child owns the home and is giving it to the parent.
- Proposition 58 only applies to a transfer between parent and child.
- The person receiving the home must be the parent or the child. Under Proposition 58, a “child” may be a son, daughter, son-in-law, daughter-in-law, stepchild, or child adopted before the age of 18.
- The exclusion is not automatic. You must complete a “Claim for Reassessment Exclusion for Transfer between Parent to Child” form within 3 years of the transfer.
- There is no dollar limitation on the original owner’s principal residence. The parent’s home could be worth 5 million dollars at the date of transfer, but if the parent bought the home for $100,000 then the child’s property tax basis is going to be $100,000.
- There is a $1 million base-year cumulative value limit on the transfer of non-principal residences. Multiple non-principal properties may be transferred without property tax reassessment only up to this limit.
Proposition 193 - Transfer between Grandparent and Grandchild
- A home that is transferred from grandparent to their grandchild may be excluded from reassessment.
- The parent of the grandchild MUST be deceased as of the date of the transfer.
- There is no dollar limitation if the home that is being transferred is the grandparent’s principal residence.
- The exclusion is not automatic. You must complete a “Claim for Reassessment Exclusion for Transfer between Grandparent to Grandchild” form.
Propositions 60 & 90 – Relocation of Homeowners Age 55 (or older)
Proposition 60 allows homeowners who are 55 years of age or older to sell their primary residence but yet retain their old property tax basis if they purchase a replacement residence within two years in the same county. Proposition 90 extends this by allowing the inter-county transfer of the property tax base.
Homeowners should be aware of the above rules when it comes to property taxes because it could literally mean saving thousands of dollars annually. The benefits granted under these propositions can only be obtained if and when the proper legal forms are completed and filed following transfer of the property(s). There are time limits and deadlines that apply.
The California Probate Timeline
The following is an outline of what and when things will happen in the usual probate process.
- File the “Probate Petition” at the courthouse (this is the start of the probate process)
- Notice of the first court hearing date published in the newspaper of general circulation in the decedent’s resident city and notice mailed to all heirs and named beneficiaries (this happens immediately after the filing of the Probate Petition)
- First court hearing date is held (this takes place approximately 5 weeks after filing the Probate Petition)
- Issued Bond -- if ordered by the judge (this is essentially insurance for the estate in the event of mismanagement by the personal representative)
- "Duties and Liabilities of Personal Representative" is filed with the court.
- “Order for Probate” signed by the judge appointing the Personal Representative (this is approximately 60 days after filing the Probate Petition)
- "Letters" are issued by the court--this is the golden ticket, the passport for the personal representative to conduct business on behalf of the estate (this is approximately 60 days after filing the Probate Petition)
- Personal Representative (PR) gathers all assets and inventories for safe keeping (PR can begin to close escrow depending on whether Full Authority or Limited Authority was granted by the court)
- “Notice to Creditors” form sent to all reasonably known creditors (creditors have 4 months to file their claim with the court)
- Real estate properties are sold if necessary (3rd to 4th month after the Probate Petition is filed, if Full Authority is granted under the IAEA)
- Litigation of any issues or disputes among heirs/creditors related to the estate.
- “Inventory & Appraisal” form filed with the court (4th to 6th month)(appraisal is done by a Probate Referee).
- If Limited Authority is granted by the court, then the Court Confirmation process is necessary to sell any real estate.
- “Change in Ownership Statement Death of Real Property Owner” Form filed with the County Recorder (4th to 6th month)
- “Claim for Reassessment Exclusion for Transfer between Parent and Child” Form filed with the County Recorder (4th to 6thmonth)
- Debts are paid (4th to 8thmonth)(e.g., Med-Cal is reimbursed, credit card debt is paid)
- Taxes paid (6th to 12th month)
- Petition for Final Distribution is filed (8th to 12th month)
- Second court hearing date (9th to 12th month)
- Order signed by the judge allowing distribution to heirs (9th to 12th month)
- Final Distribution to heirs/beneficiaries (9th to 12th month)
- Case closed (10th to 12th month)
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