What Is Probate?

Many people aren’t sure what the term "probate" really means. They think of it only as some long, drawn out, and costly legal formality surrounding a deceased person’s affairs. Technically, probate means "proving the will" through a probate court proceeding. A generation ago, virtually every estate had to be reviewed by a judge before it could pass to those who would inherit it. Today there are several ways to transfer property at death, some of which don’t require formal court proceedings, so the term is now often used broadly to describe the entire process by which an estate is settled and distributed.

For example, a surviving spouse or domestic partner may receive property outright from the deceased spouse or partner without any probate proceedings at all. Joint tenancy property also escapes the need for formal probate, as does property left in a living (inter vivos) trust and property in a pay-on-death bank account (Totten trust). If an estate consists of property worth less than $100,000, it, too, can be transferred outside of formal probate. Fortunately, the paperwork necessary to actually transfer property to its new owners in the foregoing situations is neither time-consuming nor difficult. We discuss all of these procedures, as well as how to do a formal probate court proceeding.

There is one thing you should understand at the outset: The person who settles an estate usually doesn’t have much choice as to which property transfer method to use. That is, whether you are required to use a formal probate or a simpler method to transfer property at death depends on how much (or little) planning the decedent (deceased person) did before death to avoid probate. This is discussed in detail as we go along.

Both formal probate and some of the other nonprobate procedures involve filing papers at a court clerk’s office, usually in the county where the decedent resided at the time of death. In larger counties, going to the main courthouse and other government offices in person can be an ordeal. To avoid this, you may settle most simple estates entirely by mail, even if a formal probate court proceeding is required. In other words, most probate matters don’t require that you appear in court before a judge. In fact, settling an estate by mail is now the norm in many law offices. We will show you how to do this as we go along.

What Is Involved in Settling an Estate?

Generally, settling an estate is a continuing process which:

• determines what property is owned by the decedent
• pays the decedent’s debts and taxes, if any, and
• distributes all property that is left to the appropriate beneficiaries.

When a person dies, she may own several categories of assets. Among these might be household belongings, bank and money market accounts, vehicles, mutual funds, stocks, business interests, and insurance policies, as well as real property. All property owned by the decedent at the time of his or her death, no matter what kind, is called his or her "estate."

To get this property out of the name of the decedent and into the names of the people who inherit it requires a legal bridge. There are several types of legal procedures or bridges to move different kinds of property to their new owners. Some of these are the equivalent of large suspension bridges that will carry a lot of property while others are of much less use and might be more analogous to a footbridge. Lawyers often use the word "administrate" and call this process "administering an estate." In this book we refer to these procedures collectively as "settling an estate."

Most of the decedent’s estate will be passed to the persons named in his or her will, or, if there is no will, to certain close relatives according to priorities established by state law (called "intestate succession"). However, to repeat, no matter how property is held, it must cross an estate settlement bridge before those entitled to inherit may legally take possession. The formal probate process is but one of these bridges. Some of the other bridges involve community property transfers, clearing title to joint tenancy property, winding up living trusts, and settling very small estates that are exempt from probate. Again, we discuss all of these in detail.

How Long Does It Take to Settle an Estate?

If a formal probate court procedure is required, it usually takes from seven to nine months to complete all the necessary steps, unless you are dealing with a very complicated estate. On the other hand, if the decedent planned his or her estate to avoid probate, or the estate is small, or everything goes to a surviving spouse or domestic partner, then the estate may be settled in a matter of weeks by using some easier nonprobate procedures.

CAUTION: The procedures in this book are only for California estates. Real property and tangible personal property (see Chapter 4 for definitions) located outside of California are not part of a California estate and cannot be transferred following the instructions in this book. To transfer property located outside of California, you will either have to familiarize yourself with that state’s rules (these will be similar, but by no means identical to those in effect in California) or hire a lawyer in the state where the property is located.

What This Book Covers

Not all estates can be settled entirely by using a self-help manual. Although most California estates can be settled easily with the procedures described in the following chapters, some will require at least some formal legal assistance. Therefore, it's important to know if the one you are dealing with is beyond the scope of this book.

First, an estate that can be settled using this book (a "simple estate," for lack of a better term) is one that consists of the common types of assets, such as houses, land, a mobile home, bank accounts, household goods, automobiles, collectibles, stocks, money market funds, promissory notes, etc. More complicated assets, such as complex investments, business or partnership interests, or royalties from copyrights or patents, are often not as easy to deal with because they involve additional factors, such as determining the extent of the decedent's interest in the property and how that interest is transferred to the new owner. However, it may be possible to include unusual assets in a simple estate if the person settling the estate is experienced in such matters or has help from an accountant or attorney along the way. When questions arise as to ownership of an asset, or when third parties (anyone not named in the will or by intestacy statutes) make claims against the estate (as would be the case if someone threatened to sue over a disputed claim), you have a complicated situation that will require help beyond this book.

Second, for an estate to be "simple" there should be no disagreements among the beneficiaries, especially as to the distribution of the property. There is no question that dividing up a decedent's property can sometimes bring out the worst in human nature. If you face a situation where family members are angry and lawsuits are threatened, it is not a simple estate. To settle an estate without unnecessary delays or complications and without a lawyer, you need the cooperation of everyone involved. If you don't have it (for example, a disappointed beneficiary or family member plans to contest the will or otherwise engage in obstructionist behavior), you will have to try to arrange a compromise with that person by using formal mediation techniques or the help of a person respected by all disputants. If this fails, you will need professional help. (See Chapter 16.)

Third, and contrary to what you might think, a simple estate does not have to be small. The only additional concern with a large estate is federal estate taxes, which affect estates of at least $2 million for deaths in 2006 through 2008. Estate income tax returns may also be required. You can hire an accountant who is familiar with estate taxes to prepare the necessary tax returns for you, leaving you free to handle the rest of the settlement procedures yourself. We provide an overview of estate taxation in Chapter 7.

Simple Estate Checklist

The checklist below shows all the basic steps in settling a simple estate in California. Each step is thoroughly explained later in the book.

This list may appear a bit intimidating at first, but don’t let it discourage you. Not all of these steps are required in every situation, and even then you won’t find them difficult. As with so many other things in life, probating a simple estate is much like putting one foot in front of the other (or one finger after another on your keyboard). If you take it step by step, paying close attention to the instructions, you should have little difficulty. Remember, if you get stuck, you can get expert help to solve a particular problem and then continue with the rest.

Important Terms in Probate

As you read through this material, you will be introduced to a number of technical words and phrases used by lawyers and court personnel. We define these as we go along, with occasional reminders. If you become momentarily confused, refer to the glossary, which follows Chapter 16.

The Gross Estate and the Net Estate

You will encounter the terms "gross estate" and "net estate" while settling any estate. The distinction between the two is simple as well as important. The decedent’s gross estate is the fair market value at date of death of all property that he owned. It includes everything in which the decedent had any financial interest—houses, insurance, personal effects, automobiles, bank accounts, unimproved land, etc.—regardless of any debts the decedent owed and regardless of how title to the property was held (for example, in a living trust, in joint tenancy, or as community property). The net estate, on the other hand, is the value of what is left after subtracting the total amount of any mortgages, liens, or other debts owed by the decedent at the time of death from the gross estate.

EXAMPLE: Suppose Harry died, leaving a home, car, stocks, and some cash in the bank. To arrive at his gross estate you would add the value of all his property without looking to see if Harry owed any money on any of it. Let’s assume that Harry’s gross estate was $500,000. Now, assume when we check to see if Harry owed money, we discover that he had a mortgage of $150,000 against the house. This means his net estate (the value of all of his property less what he owed on it) would be worth $350,000.

EXAMPLE: If Bill and Lorie, husband and wife, together own as community property a house, car, and savings account having a total gross value of $800,000, and owe $300,000 in debts, the net value of their community property would be $500,000. However, if Lorie died, only one-half of their property would be included in her estate because under California community property rules, discussed in detail in Chapter 4, the other half is Bill’s. Thus, Lorie’s gross estate would be $400,000 and her net estate $250,000.

[Checklist for Settling a Simple Estate] omitted for online sample chapter

[Chart for How to Settle an Estate] omitted for online sample chapter

The Probate Estate

The "probate estate," quite simply, is all of the decedent’s property that must go through probate. This is very likely to be less than the total amount of property the decedent owned, because if an asset already has a named beneficiary, or if title is held in a way that avoids probate, then it isn’t part of the probate estate. To return to the bridge analogy we discussed earlier, this means that property which is held in one of these ways can be transferred to the proper beneficiary using one of the alternate (nonprobate) bridges.

As a general rule, the following types of property need not be probated:

• joint tenancy property
• life insurance with a named beneficiary other than the decedent’s estate
• pension plan distributions
• property in living (inter vivos) trusts
• money in a bank account that has a named beneficiary who is to be paid on death (this is sometimes called a "Totten trust")
• individual retirement accounts (IRAs) or other retirement plans that have named beneficiaries, and
• community property or separate property that passes outright to a surviving spouse or domestic partner (this sometimes requires an abbreviated court procedure).

Put another way, the probate estate (property that must cross the formal probate bridge) consists of all property except the property that falls into the above categories. Where there has been pre-death planning to avoid probate, little or no property will have to be transferred over the probate court bridge. To repeat, whether or not probate is needed is not in your hands. The decedent either planned to avoid probate, or didn’t—there is nothing you can do once death has occurred.

CAUTION: You can simplify the settlement of your own estate, however. The best resources covering this subject are Plan Your Estate, by Denis Clifford (Nolo) and 8 Ways to Avoid Probate, by Mary Randolph (Nolo). You can also find lots of good information in the Wills & Estate Planning part of Nolo’s website, www.nolo.com.

The Taxable Estate

Although this book is primarily about settling an estate, we include some mention of taxes because estates over a certain value are required to file a federal estate tax return. Therefore, you should know how to compute the value of the decedent’s estate for tax purposes, which—not surprisingly—is called the "taxable estate." Keep in mind that the property that must go through probate (probate estate) is not necessarily the same as the taxable estate. Not all assets are subject to probate, but they are all counted when determining whether estate taxes must be paid. In other words, the taxable estate includes all assets subject to formal probate, plus joint tenancy property, life insurance proceeds (if the decedent was the owner of the policy), death benefits, property in a living trust, and property in any other probate avoidance device. However, if any of the assets are community property (discussed in Chapter 4), only the decedent’s one-half interest is included in his or her taxable estate.

If the estate is large enough to require a federal estate tax return, any tax is computed on the net value of the decedent’s property (net estate). That is, the tax is determined by the value of all property, less any debts owed by the decedent and certain other allowable deductions.

Insolvent Estates

An "insolvent estate" is one that does not have enough assets to pay creditors in full. Insolvent estates are subject to special rules and we do not include specific details here. Usually you must consult an attorney.

In general, however, creditors are divided into classes according to their respective priorities. (Probate Code § 11420.) First priority is given to debts owed to the United States or to the State of California, such as various taxes. Those debts must be paid before other debts or claims. (Probate Code § 11421.) Next in priority are administration expenses (attorneys’ fees, court costs, etc.) and, after that, funeral expenses, last illness expenses, judgment claims, and general creditors are paid, in that order. Each class is paid in full before going to the next class.

When you come to a class that cannot be paid in full, the payments are prorated. For example, if Creditor One is owed $5,000 and Creditor Two is owed $10,000 and only $1,000 is left, Creditor One gets one-third of the $1,000 and Creditor Two gets two-thirds. An accounting must be presented for insolvent estates in a formal probate court proceeding. In summary proceedings (Chapter 11), the successors are responsible for paying the decedent’s unsecured debts out of the property they receive. The debts are paid in the same order, and the successors are not personally liable for debts that exceed the value of the estate property.

Estate Taxes

Not every estate will owe estate taxes. A person who dies in 2007 and 2008 may own up to $2 million in property without having to pay any estate taxes. Estates having a gross value over the exemption must file a federal estate tax return. The tax is computed on the net estate after certain allowable deductions have been taken.

Even if the net estate is under the exempt amount, however, a return must still be filed if the estate has a gross value over the threshold amount, although no tax will be owed. For example, if someone who dies in 2008 has a gross estate of $2.2 million and debts of $400,000, a federal estate tax return must be filed, although no tax will be due because the net value of the estate is under the $2 million exempt amount. We discuss federal estate tax in more detail in Chapter 7.

California does not impose its own inheritance tax or estate tax.

CAUTION: Pay taxes first. Although most estates don’t have to worry about federal estate taxes, if yours is a large estate for which federal estate taxes are due, the taxes should be paid before property is transferred to the people who inherit it. Many wills set aside money for the payment of taxes, so this isn’t a problem.

Federal and state income tax returns for the decedent’s last year and sometimes for the estate (if there is a formal probate) must also be filed. (See Chapter 7.)

Do You Need an Attorney?

The law does not require you to hire an attorney to settle an estate. The average simple estate can be settled with the guidelines and background information in this book. Nevertheless, some complications that require special knowledge or handling may crop up even in an otherwise simple estate. Some examples are:

• Ambiguities in the will. For example: "I give $50,000 to the poor children in the County Hospital." This would raise several problems. Does "poor" mean low income or just unfortunate enough to be in the hospital? And what did the decedent intend when it came to dividing the money? Is it to be divided among all the children in the hospital on the date of decedent’s death, or did the decedent intend to set up a central fund to be used to make life a little easier for all kids in the hospital?
• Contested claims against the estate (for example, a surviving spouse or domestic partner who claims a community property interest in property left by will to someone else);
• The decedent’s unfinished contracts (for example, a sale of real property begun but not completed prior to death);
• Insolvent estates (more debts than assets);
• Claims against the estate by people who were left out or think they were given too little; or
• Substantial property given to a minor, unless legal provisions to handle this are made in the will.

Besides the satisfaction of doing the estate work yourself, another advantage is not having to pay attorneys’ fees. In a probate court proceeding, standard attorneys’ fees have been set by law and are based on a percentage of the gross estate (the gross value of the assets that are subjected to probate). It’s important to understand, however, that even though allowed fees are set out in the statute, you have the right to negotiate a lower fee with your lawyer. In other words, think of these statutory fees as the maximum the attorney is allowed to charge, and negotiate downward from there.

"Gross value" refers to the total value of the property before subtracting any encumbrances or debts owed by the decedent. Computing attorney’s fees based on the gross estate, of course, means lawyers do very well, since the gross value of the property is often higher than the value of what the decedent actually owned after the debts and encumbrances are subtracted. For instance, the gross value of your house may be $350,000, but after you subtract your mortgage, you may actually own only a portion of this (say $50,000). Yet the attorney’s fees are based on the $350,000 gross value figure.

The formula for computing attorneys’ fees in a formal probate court proceeding is found in California’s Probate Code §§ 10810 and 10811. An attorney may collect:

• 4% of the first $100,000 of the gross value of the probate estate
• 3% of the next $100,000
• 2% of the next $800,000
• 1% of the next $9,000,000
• 0.5% of the next $15,000,000, and
• a "reasonable amount" (determined by the court) for everything above $25,000,000.

For example, in a probate estate with a gross value of $100,000 the attorney is allowed $4,000; in an estate with a gross value of $200,000 the attorney may collect $7,000, and so on. If, for example, a probate estate contains only one piece of real property, perhaps an apartment building worth $600,000, the attorney could collect $15,000 to transfer title in a probate proceeding, even if the building might have a substantial mortgage that reduces the decedent’s equity to only $150,000.

If an estate doesn’t require formal probate because it can be settled in another way, such as a community property transfer to a surviving spouse or domestic partner or a joint tenancy termination, then an attorney is not entitled to receive a statutory fee. In these situations, an attorney will bill for his or her time at an hourly rate, which commonly varies from $150 to $350 an hour.

EXAMPLE: Returning to Harry’s estate for a moment (discussed above), if a lawyer were hired to probate Harry’s estate, the fee could be as high as $13,000, computed on a gross estate of $500,000. Let’s assume that Harry’s will left all of his property to his daughter, Millicent, and son, Michael, and one of them, acting as executor, probated Harry’s estate without an attorney and waived the executor’s fee. The entire job could be accomplished through the mail for a cost of approximately $650 ( including filing, publication, certification, and appraisal fees).

California is one of only a few states with this kind of fee system. The California Law Revision Commission has recommended that statutory fees be abolished, but the legislature hasn’t acted.

Some people hire attorneys to settle even simple estates for much the same reason they order over-fancy funerals. When a friend or loved one dies, everyone close to the decedent is naturally upset. It often seems easier to hire an expert to take over, even one who charges high fees, than to deal with troublesome details during a time of bereavement. Obviously, there is nothing we can do to assuage your grief. We would like to suggest, however, that expending the time and effort necessary to keep fees to a minimum and preserve as much of the decedent’s estate as possible for the objects of his or her affection is a worthy and honorable endeavor, and may even constitute a practical form of grief therapy.

Just because you do not wish to hire an attorney to probate an entire estate, however, does not mean you should never consult one as part of the estate settlement process. As we discuss in detail in Chapter 16, there are at least three times we believe a consultation with a lawyer is wise:

• Complicated estates. As noted above, not all estates are relatively simple. If the estate you are dealing with is likely to be contested, or has complicated assets, such as a going business owned by the decedent or substantial income from royalties, copyrights, trusts, etc., see a lawyer.
• Questions. If, after reading this book, you are unsure of how to proceed in any area, get some help. You should be able to consult an attorney at an hourly rate, clear up the problem area, and then finish the estate settlement job on your own.
• Checking your work. If you face a fairly involved estate, you may want to do all the actual work yourself and then have it checked by a lawyer before distributing the estate. This will be much less expensive than paying the attorney to handle the whole job and, at the same time, it will make you feel more secure.