It may be the goal of most clients to avoid probate, not everyone actually knows what that means, or how to accomplish it. Estate planning can accomplish many goals and avoiding probate is one of them. But, avoiding probate does not necessarily mean avoiding estate taxes. So, first you need to understand what probate involves and then consider one of the four ways a probate attorney can help you avoid the process.
What probate involves and why it is necessary
One way to look at the process is that probate is a method for transferring ownership of property to specific beneficiaries. Probate is the method of last resort when all other assets have been transferred by a trust or some other estate planning tool. The probate process is governed and supervised by the probate court, which must enter the final order of distribution before the proceedings are complete.
Four strategies for avoiding probate
As your attorney can explain, there are basically four ways to transfer ownership of the assets in your estate, which do not require the probate process. In California, those four methods include by operation of law, by contract, through a trust and through summary probate. When these methods are done correctly, with the help of an experienced and qualified attorney, you can avoid the expensive and time-consuming process of probate.
Transferring an estate by operation of law
Pursuant to California statute, there is a set of laws referred to as the California Multi-Party Account Laws. These regulations determine who owns the funds that remain in a bank account after the bank account holder has died. Under these rules, the decedent’s share of the funds will pass according to the terms of the contract the account holder has with the bank. They could also pass by operation of law to certain survivors. All that is required is presenting the death certificate to the bank and a new account will be opened in the name of the survivor. As such, probate is not necessary.
However, this is not always the best manner to distribute assets after death and it does not address problems with an account holder’s incapacity. Caution is required before using this strategy.
Transferring property by right of survivorship
If two people hold title to a piece of property in “joint tenancy,” that means they have designated themselves as have full ownership of that property upon the death of the other. This is also referred to as the “right of survivorship.” Spouses in California can hold property as community property with right of survivorship, as well. However, unlike joint tenancy, community property that does not specifically designate it as “right of survivorship,” will not pass through survivorship. Instead, the distribution of the property is controlled by the decedent’s will. The right of survivorship applies to both real and personal property, but it does not apply to bank accounts, which are governed instead by the California Multi-Party Account Laws.
Joint tenancy also is not always the best manner to distribute assets after death and it does not address problems with an owner’s incapacity. Unexpected tax liabilities could also occur. Once again, caution is required before using this strategy.
Transfer of property by designation of beneficiary
California also has a statute called the Nonprobate Transfer Rules. This set of rules governs transfers of property by beneficiary designation. The most common types of beneficiary designation transfers we are all familiar with, and those are life insurance policies and retirement accounts. Upon the death of the insured or the employee, the money held in these types of accounts will be distributed to the person designated as beneficiary. The Nonprobate Transfer Rules also apply to Transfer on Death (TOD) and Pay on Death (POD) securities.
Like the two prior transfer strategies mentioned, TODs and PODs may also not be the best manner to distribute assets after death. They, too, do not address problems with an account owner’s incapacity. Tax strategies may also be lost. This is another case where caution is required before using this strategy.
Transferring assets by trust agreement
Any assets being held in trust can be transferred after your death without going through the probate process. Under a trust agreement, your property will first be transferred to the name of the trust in order to fund the trust. Then the property will ultimately be transferred to the named beneficiaries after your death. Your trustee is the person you select to manage the property until that time. The law has changed over the years, so that now the person creating the trust can also serve as the initial trustee, at least until their death.
As compared to the other strategies mentioned here, a trust-based transfer strategy is most likely the superior way to handle transfer BEFORE and after death. Effective tax strategies can also be employed.
California’s summary probate procedure
The California Probate Code provides for summary probate procedures, which is an abbreviated process. The terms of the decedent’s will are followed to distribute the assets, without the need for a full probate proceeding. This can be a cheaper and quicker option. However, in order to be eligible for the summary probate procedure, your estate must fall into one of these categories:
- total personal property not exceeding $150,000, or
- total real estate in California of less than $150,000 value
The best way to determine which of these strategies are best for your situation is to consult with an experienced and qualified estate planning attorney.
If you have questions regarding probate, or any other estate planning issues, contact the Northern California Center for Estate Planning and Elder Law for a consultation, either online or by calling us at (916) 437-3500.