For legal purposes, the term “property” means “assets,” including real property, tangible personal property and intangible personal property. It is not limited to “real estate” when used in a legal document.
For legal purposes, the term “estate,” by itself, generally means a “collection of assets.” In the context of estate planning, there are different types of estates (i.e., collections of assets), which have names generally reflective of their purposes. There are “gross estates” subject to federal estate taxation, “probate estates” subject to decedent estate (i.e., probate) administration, “trust estates” subject to trust administration, “conservatorship estates” subject to conservatorship administration and “guardianship estates” subject to guardianship administration.
Probate is the state court judicial proceeding that is generally used to distribute certain assets of a deceased person (“decedent”) and to pay decedent’s creditors. It is generally required when there is no other mechanism provided by law for transferring ownership of a decedent’s assets from the decedent to decedent’s intended beneficiaries. The probate process is generally completed when title to the last asset is changed into the name of the intended beneficiary through the court’s final order for distribution. The probate process can be thought of as simply the last option for transferring title from the decedent to the intended beneficiaries, when no other options work. (See California Probate Code §7001)
Do all assets of a decedent pass through probate? No. There are a number of legal mechanisms available for transferring ownership of an asset outside of probate (i.e., avoiding probate). In California, those mechanisms consist of the following:
- By operation of law, including by right of survivorship and the Multi-Party Account Laws.
- By contract including beneficiary designation;
- By trust; and
- By summary probate procedure.
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A trust is a legal arrangement or relationship where assets are entrusted into the care of one individual for the benefit of another individual. The trust arrangement usually involves a relationship between three parties, consisting of the “settlor,” the “trustee,” and the “beneficiary.” The settlor, who may also be referred to as the trustor, grantor or donor, establishes the trust and transfers the assets to the trustee of the trust. The “trustee” is the individual selected by the settlor to be in charge of the entrusted assets and to manage them for the benefit of the beneficiary. The trustee is the legal owner of the assets, holding title for the benefit of someone else – the beneficiary. The beneficiary is the individual intended by the settlor to receive the benefit, use, or enjoyment of the asset.
Yes. Trusts can be created for all different types of purposes, as long as the purpose is lawful. Trusts can generally be broken down into the following broad categories: revocable inter vivos trusts, irrevocable inter vivos trusts, and testamentary trusts.
A revocable trust is a trust in which the settlor reserves the right to amend it, modify it, revoke it or terminate it. It is often thought of as a substitute for a “Will,” since like a Will, it can generally be revoked and changed up until the time of death. By definition, a revocable trust is “inter vivos,” which in Latin means “between the living,” having immediate effect while the settlor is still alive and has the ability to revoke the trust. The term “living trust” or “inter vivos” trust is often used interchangeably with the term “revocable trust.” This terminology is somewhat misleading, since irrevocable trusts, discussed below, can also be established inter vivos.
An irrevocable trust is a trust in which the settlor surrenders any right to change the terms of the trust after the trust is created. These trusts are generally designed to provide estate tax and creditor protection benefits to the beneficiaries. The irrevocable trust can be established “inter vivos,” or on death. In the context of a revocable trust, when the settlor dies and with him/her the ability to revoke the trust, the revocable trust converts to an irrevocable trust.
A testamentary trust is a trust that is established under someone’s Will. It does not take effect until the court approves the Will containing the terms of the testamentary trust. By definition, the testamentary trust is irrevocable, since the testator is deceased.
No, unless the trustee is intended to hold real property, which case the trust must be in writing to avoid the Statute of Frauds. However, it can be very difficult for the beneficiary to prove the terms of an oral trust, and there is a strong presumption in California that, without a written trust document, the transfer to the trustee was an outright gift to the trustee. (See Probate Code §15207)
Not necessarily. Estate taxes, also known as “death taxes,” are a federal tax imposed on a decedent’s “estate.” The federal estate tax definition for an estate is much broader than the definition for a probate estate. It includes all assets in which the decedent had an interest at the time of the decedent’s death. (Internal Revenue Code §2031) The assets subject to the tax include, not only probate assets, but also assets passing by right of survivorship, beneficiary designation, trust agreement, and summary probate procedure. You could have no assets passing through probate, but still have a taxable estate for federal estate tax purposes.
No, California does not have a separate estate or inheritance tax (some states, such as Washington and New York do). None of the estate taxes paid by estates of California residents go to the State of California.
Yes, presently, each decedent has a $12,920,000 federal estate tax exemption. If the decedent’s estate, for federal estate tax purposes, is under $12,920,000 then there will generally be no federal estate tax on it. For amounts in excess of $12,920,000, there will generally be an estate tax imposed at the rate of 40% on the excess.
The current federal estate tax exemption is $12,920,000 and is adjusted annually for inflation, so the exemption does increase annually. The current federal estate tax law has a 2026 “sunset” date when the exemption would reset to $5,000,000.
Yes, there is a gift tax, which may apply to assets that an individual (referred to as a “donor”) gives away during his or her lifetime.
Yes, gifts by a single donor to a single individual of $17,000 or less per year are generally excluded from any gift tax. This is often referred to as the annual exclusion amount. (There are some exceptions to the $17,000, since the gift must qualify as a gift of a “present interest.”) When two parents are making gifts to a single child in a single year, they can collectively give $34,000 to that child each year. If the parents have three children and they want to make full utilization of the annual exclusions amounts each year, they can give $102,000 away to the children each year in the aggregate. The $17,000 figure is also periodically adjusted for inflation, typically every 3 to 4 years. It has been $17,000 since January 1, 2023.
A nontaxable gift is a gift that is not subject to the gift tax and is not counted against the $12,920,000 lifetime gift tax exclusion, discussed below. The $17,000 per year annual exclusion gift is one type of nontaxable gift. Other types of nontaxable gifts include gifts for someone’s education through payments of that individual’s tuition, gifts for the individual’s medical expenses by payments directly to the care provider, and charitable gifts. These education, medical and charitable gifts have no upper limit. A taxable gift in turn is any gift or portion of a gift that does not fall under the annual gift tax exclusion amount and does not qualify as an educational, medical or charitable gift.
It depends on the size of the gift. Under current law, the donor may use all or part of his or her $12,920,000 estate tax exemption against the gift tax. It is effectively one “unified exemption,” which can be used to shield gift taxes and estate taxes. It is now sometimes referred to as the “$12,920,000 lifetime gift tax exclusion.” To the extent gifts are made, which exceed the $17,000 per year annual exclusion amount and therefore use up part of the $12,920,000 exclusion, there will be less exclusion available on the donor’s death to shield assets still remaining in the estate. Unlike the $17,000 annual exclusion amount, which can be used year after year, the $12,920,000 exemption amount is cumulative. Note: Whenever taxable gifts are made in any year, even if there is no gift tax due because of use of the $12,920,000 lifetime gift tax exclusion, the donor of the gift is required to file a federal gift tax return (IRS Form 709) reporting the application and using up of part of the $12,920,000 gift tax exemption.
First and foremost, you should never give away anything that you reasonably believe you may need for your own care later. Assuming you can give away $12,920,000 now, without jeopardizing your own care, it is generally better to use up the exemption now rather than to wait until death to use it. There are several reasons for this, including: (1) if you use it now, any appreciation in the assets given away, which occurs between now and the time of your death, will not be subject to an estate tax on your death; (2) you have many more gift and estate tax planning options available if the transfers are made during your lifetime, allowing you to effectively leverage the $12,920,000 to give away significantly more than $12,920,000 in gifts; and (3) you may lose the exemption if Congress were to pass new estate and gift tax legislation in the future, although this is not anticipated – hence the adage “use it or lose it”.
Admittedly, putting your home into joint tenancy with a child now can make for a quick and efficient transfer of your home on the death to the child. It terms of paper work, on your death, it usually involves the child producing a death certificate and filing out a couple of forms, as well as possibly recording an Affidavit –Death of Joint Tenant, with the county recorder. More often than not, however, the placing of the home into joint tenancy has unintended consequences. First, putting your home into joint tenancy means you have just made a gift of 50% of your home to your child. He or she has an equal right to live there without paying rent and may sell his or her half to anyone desired. Second, if your child has creditor problems, the creditors may be able to force the sale of the home to satisfy their judgment against your child’s half of the sale proceeds. Third, by simply recording a quitclaim deed, your child severe the joint tenancy without you knowing, in which case on the child’s death, the child’s half of the property is likely to pass to the child’s children or spouse, and not back to you. Fourth, the child can give away his or her half of the home to anyone desired, such as your son-in-law or daughter in law, without you knowing. Last, if your child predeceases you, then you will own all of it again, having accomplished nothing through the work of placing the asset into joint tenancy to begin with. All things considered, it is virtually always more preferable to use a revocable trust to hold your home.
No. Dying “intestate” means dying without a Will. Whether you die with a Will, in which case the assets subject to the probate pass to your named beneficiaries as directed by your Will, or you die without a Will (i.e., intestate), in which case the assets subject to the probate pass to your legal heirs as defined by California law, a probate will be required to transfer ownership of any assets which do not otherwise pass by right or survivorship, operation of law, beneficiary designation or summary probate procedure. In fact, for a Will to even be considered valid, a Will must be probated through the court system.
Because the probate process involves a court proceeding, it generally requires more of the lawyer’s time than the typical trust administration, as well as additional court filing fees. Documents filed in probate proceedings are public records available for anyone to look at. All privacy is lost. Further, the statutory notice periods required in probate proceedings generally do not apply to trust administrations, causing it to take significantly longer to close a probate administration than a trust administration. More recently, because of budget constraints and court closures, California probate court calendars are very full, causing hearing dates on important petitions to be pushed out months at a time.
Yes. Although California law sets the amount of maximum amount of attorney’s fees and personal representative fees payable for ordinary services in a probate proceeding, those fees are subject to negotiation downward by agreement of the personal representative and the attorney. However, a higher fee for ordinary services, above the statutory fee, may not be negotiated. The amount of the statutory fees is set forth in Probate Code §10800 and §10810. Generally, the fees are a fixed percentage of the date of death value (without reduction for mortgages and other debts) of the assets in the probate estate, after taking into account certain receipts, gains and losses. Those percentages decrease as the size of the estate increases and are as follows:
||First $100,000 in assets
||Next $100,000 in assets
||Next $800,000 in assets
||Next $9,000,000 in assets
||Next $15,000,000 in assets
||All amounts over $25,000,0000
Assuming for the sake of simplicity, that there are no receipts, gains or losses, the statutory fee for ordinary services on $4,000,000 probate estate would be $53,000. Calculated as follows:
The attorney and the personal representative each receive their own ordinary fee. As noted in the above example, in the case of a $4,000,000 probate estate, the attorney’s fees for ordinary services would be roughly $53,000 and the personal representative’s commission for ordinary services would be roughly $53,000.
No. The attorney and personal representative may also seek payment of an extraordinary fee for extraordinary services. Extraordinary services, generally speaking, are those services providing a benefit to the probate estate that are not considered ordinary services. A relatively complete listing of the extraordinary services, which may warrant extraordinary fees, is set forth in Rule 7.703 in the California Rules of court. The link is as follows: 2018 California Rules of Court Rule 7.703