California Estate Administration Through Probate
All wills must go through a legal process called probate, where an authorized court administrator examines the will. In California, probate is the court supervised legal process through which an estate is administered.
Overview of California Probate
- First, a probate case is opened and an executor (if there is a will) or an administrator (if there is no will) is appointed as personal representative.
- Next, the personal representative gathers information and provides notice to the beneficiaries (those who have the legal right to inherit) and creditors.
- Then, the personal representative completes an inventory of the estate’s assets to determine how much the decedent’s property is worth.
- Next, creditor claims are reviewed and paid by the estate.
- Finally, distributions from the estate are made to the beneficiaries.
Personal Representative Appointed in Probate
At the beginning of probate, a personal representative is appointed to act on behalf of the estate; this personal representative ensures estate property is secured and maintained until it is distributed to heirs. If a decedent had a will, the representative is the “executor” named in the will. The named executor submits the will with a petition for probate to the court of the county in which the decedent most recently resided, and pays the filing fee.
If the decedent did not have a will, the probate court will appoint an “administrator” as the personal representative under Probate Code § 8460. When the probate court determines the will is valid and the executor is suitable to be an executor, the court issues a letter of administration formally appointing and empowering the executor to act on behalf of the estate. Cal. Prob. Code §§ 8400,8405. The personal representative of an estate owes a fiduciary duty to the estate and to the heirs of the decedent. Cal. Prob. Code §§ 9600, 9601.
Gathering Information for Probate Administration
The personal representative identifies and collects information needed for administration of the estate. The personal representative identifies potential beneficiaries, creditors, and assets of the estate.
Next, the personal representative provides beneficiaries and creditors with notice of the opening of the estate. Cal. Prob. Code §§ 8100, 8110, 8112,9050. California probate law requires creditor notices to be sent within 4 months after appointment or within 30 days of the personal representative learning of the creditor’s potential claim, whichever is later. Cal. Prob. Code § 9051. Then, creditors have 60 days from the notice or 4 months from the representative’s appointment, whichever is longer, to file claims against the probate estate. Cal. Prob. Code § 9100.
Taking Inventory of Estate Assets in Probate Administration in CA
A personal representative must file an inventory of property to be administered in the decedent’s estate along with an appraisal of the property in the inventory within 4 months after letters are first issued. Cal. Prob. Code §§ 8800, 8801.
An inventory of estate property must include all property to be administered in the decedent’s estate.
Under Probate Code § 8850(b), the inventory shall specify the following property:
“(1) [M]oney owed to the decedent, including debts, bonds, and notes, with the name of each debtor, the date, the sum originally payable, and the endorsements, if any, with their dates. The inventory shall also specify security for the payment of money to the decedent, including mortgages and deeds of trust. If security for the payment of money is real property, the inventory shall include the recording reference or, if not recorded, a legal description of the real property.
(2) A statement of the interest of the decedent in a partnership, appraised as a single item.
(3) All money and other cash items, as defined in Section 8901, of the decedent.”
The personal representative is responsible for filing the decedent’s final income tax and federal estate tax returns, if necessary. Any income tax refunds become an asset of the estate.
Handling Creditor Claims in a California Probate Court
A creditor claim is essentially a demand for payment against the estate. In order to demand payments, creditors file claims against the estate in probate court and serve a copy on the personal representative. Cal. Prob. Code §§ 9100, 9150.
When a personal representative receives a creditor claim, they may accept the claim, reject it, or accept it in part. If a claim is rejected, the creditor has 90 days from the rejection to institute a suit to determine the claim’s validity under Probate Code section 9250.
If a claim is accepted, it is paid by the personal representative from the estate’s bank account based on priority. Under California’s Probate Code, priority starts with administrative expenses, secured debts, funeral expenses, and bills for the decedent’s final illness; and continues through support allowances for surviving spouses and minor children, claims for unpaid wages, and general debts. Cal. Prob. Code §§ 9204, 11420-11429. If the estate does not have enough cash to pay all accepted claims, the personal representative will sell estate property to pay the claims.
Distribution of Estate Assets in Probate Court
When the estate is closed and the probate court approves distributions, the personal representative can begin to distribute estate assets to beneficiaries.
Trust Administration in California
A trust is another method of estate transfer—a fiduciary relationship in which a trustor gives another party authority to handle their assets for the benefit of a third party, beneficiaries. Although similar to probate, trust administration instead takes place without court supervision unless such supervision is formally requested.
The First Step of Trust Administration – How Trust Administration Begins
Trust administration begins with requisite notice to all trust beneficiaries and heirs of the trustors. Probate Code, section 16061.7 requires that within 60 days of a trust becoming irrevocable, which is normally at the death of the trustor, the trustee must send out written notices which include appropriate warnings and information regarding the trustee to the named beneficiaries and heirs of the decedent and allows the recipient of the notice to request a copy of the trust.
After receiving the mailed notice, the recipient has 120 days from the date of mailing to file a trust contest. If no contest is filed within 120 days, then the notice recipient may forfeit their right to file a contest. But if no notice is mailed, the statute of limitations in which a trust contest could be filed is much greater, and could be up to at least four years.
Requirements for Trust Administration in California
Proper notice under Section 16061.7 has several requirements, which include the following:
- Notification by the trustee must usually be served on each beneficiary and each heir of the deceased trustor.
- Notice must be served by mail, to the last known address or by personal delivery.
- The Notice must contain the following information:
- The identity of the trustor(s) of the trust and the date of execution of the trust instrument.
- The name, mailing address, and telephone number of each trustee.
- The address of the physical location where the principal place of administration of the trust is located.
- Any additional information that may be expressly required by the terms of the trust instrument.
- A notification that the recipient is entitled, upon reasonable request to the trustee, to receive from the trustee a true and complete copy of the terms of the trust.
There is much more to the notice requirement than meets the eye at first glance. If you have questions about trust administration or want to ensure that the administration of a trust is properly handled, contact a knowledgeable trust administration attorney for legal advice concerning your situation.
The Second Step of Trust Administration – Dealing with Real Property
In those cases where the trust holds real property, a number of steps must be followed to vest title in the successor trustee so that the property can be managed, sold, or distributed as part of the trust administration.
When a trustor dies, an Affidavit of the Death along with an original death certificate should be recorded for each piece of real property. When it is recorded, it changes the title of the property from the trustee (usually the trustor) who has died and into the names of the new trustee(s). Cal. Prob. Code §§ 13150, 13151, 13152, 13154, 13155, 13200.
The Third Step of Trust Administration – Collecting Other Assets
Once the real property is dealt with, a trustee needs to identify all the other trust assets such as bank accounts and investment accounts and have title to those assets transferred into his or her name as successor trustee.
To accomplish this, the successor trustee needs to obtain a federal tax identification number for the trust.
How to Obtain a Federal Tax ID Number for Your Trusts
Obtaining a federal tax identification number (also called an employer identification number) is very easy. With the right information, a successor trustee can obtain a tax identification number online from the Internal Revenue Service.
Transference of Trust Accounts
Once the trustee has obtained a federal tax identification number, they should have all trust accounts transferred to their name as successor trustee, using the new identification number.
What to Do if All the Assets Are Not Placed Into the Trust
When the trustor does not place all assets into the trust, those assets remain part of the decedent’s estate and are subject to the probate process.
The most common way to deal with this is through the use of a will with a “pour-over” provision. A pour-over will directs that any assets not placed into a trust during the deceased’s lifetime will be put into the trust at death and distributed according to the terms and conditions of the trust. Cal. Prob. Code §6300.
If a decedent forgot to transfer a a significant asset to the trust and the asset was specifically described in the trust or in the property schedule to the trust, then, under some circumstances, a costly probate proceeding can be avoided by using a “Heggstad Petition” under Probate Code § 850.
Once the trustee has all of the assets identified and under control, an inventory of all trust assets must be prepared and appraisals for trust assets that do not have a readily ascertained value should be obtained. Assets such as real property should be appraised immediately from the date of death.
The Fourth Step of Trust Administration – Ascertaining and Paying Debts & Taxes
The Fifth Step of Trust Administration – Accounting and Tax Matters
It is the obligation of the trustee to satisfy any tax liabilities owed. If the decedent owned real property, the trustee should make sure that real property taxes are paid before the due dates.
To determine whether a federal estate tax return must be filed for the deceased settlor, the trustee needs to add up the total value of the decedent’s estate, including both trust assets and no-trust assets. If the total value of the estate is more than the exemption amount, then it will be necessary to file Form 706 federal estate tax return. However, if the decedent made gifts during his or her lifetime, the decedent may have already used up a portion of the exemption amount and thus even if the estate is less than the exemption amount, a federal estate tax return may still be required.
A trustee will want to work closely with an attorney and an accountant to evaluate whether a federal estate tax return is required.
The IRS requires that the federal estate tax Form 706 be filed within 9 months of death.
Filing Income Tax Returns
Whenever a trust becomes irrevocable, tax returns are required each year. This is filed on Form 1041 U.S. Fiduciary Income Tax Return.
The Sixth Step of Trust Administration – The Accounting in Trust Administration
A living trust is only revocable while the trustor(s), the person(s) who created the living trust, are alive and well. Once the trustor loses capacity or passes away, their living trust becomes irrevocable. The California Probate Code requires that a successor trustee who is administering an irrevocable trust prepare and render an accounting of their actions and administration of the trust. To satisfy that legal requirement, a successor trustee must keep detailed accounting records of the trust.
A successor trustee will need to:
- Keep track of all the trust money they are spending to wind up the decedent’s final affairs.
- Keep track of all deposits and disbursements from the trust.
- Review the trust document to see what method of accounting is required.
Some trust documents expressly require an accounting while others have waived accountings. However, even where a trust document waives an accounting, the law may still require it. So, it is recommended that successor trustees consult with an attorney early in the administration process to determine the scope of their accounting obligation.
Even where the trust waives the requirement of a formal accounting, the successor trustee will still want to keep detailed accounting in case the trust administration goes into litigation.
The Seventh Step of Trust Administration – Distribution of Trust Assets
After all of the assets have been collected, the debts paid, the tax returns filed and the tax liabilities satisfied, the accounting prepared and rendered (if required), the successor trustee will be in a position to distribute the remaining trust assets. As with all other aspects of trust administration, the terms of the trust document will dictate how the trust assets are to be distributed among the trust beneficiaries.
Allocation and Distribution of Trust Assets
Once the beneficiaries are identified, the trustee can proceed with allocating and distributing the trust assets. Before distribution, the trustee should provide a Notice To Beneficiaries under Probate Code § 16461(c)(3) and a Beneficiary Release. Also, Probate Code § 16063 requires that the trustee inform a recipient of an account that they may petition the court pursuant to Probate Code § 17200 to obtain a court review of the account and of the acts of the trustee. Claims for breach of trust are barred after the expiration of 3 years from the date the recipient receives an account or report disclosing facts giving rise to the claim.
A trustee is required to report and account at least once per year. California Probate Code § 16060, et seq., also requires the report and account to be in a certain form and contain certain notices.
An account must contain the following information:
- A statement of receipts and disbursements of principal and income that have occurred during the last complete fiscal year of the trust or since the last account.
- A statement of the assets and liabilities of the trust as of the end of the last complete fiscal year of the trust or since the last account.
- The trustee’s compensation for the last complete fiscal year of the trust or since the last account.
- The agents hired by the trustee, their relationship to the trustee, if any, and their compensation for the last complete fiscal year of the trust or since the last account.
- A statement that the recipient of the account may petition the court pursuant to annually California Probate Code §17200 to obtain a court review of the account and the acts of the trustee.
- A statement that makes a claim against the trustee for breach of trust may not be made after the expiration of 3 years from the date the beneficiary receives an account or report disclosing the facts giving rise to the claim.
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