What happens when I do not have any estate planning documents in place? (Part 1)

The following question is often asked to me: “If I don’t do any estate planning documents then what will happen to my assets when I pass away?" This question often arises when one becomes overwhelmed with the process of doing proper estate planning or they do not want to think about their own mortality. Sometimes these individuals pass away without doing any planning at all and any assets that do not pass automatically by operation of law (such as a named beneficiary on a life insurance contract, a surviving joint tenant on a deed, or a beneficiary by a number of other methods), will go through the probate process and be subject to some specific provisions of the California Probate Code.

This situation is generally called dying intestate and it occurs when someone passes away without providing instructions to the court in a properly executed or holographic will. Many people fail to understand that the surviving spouse may not receive all of the assets that go through the probate of the intestate estate (especially if the decedent had property that is characterized as separate property instead of community property) as separate property is treated differently than community property. This often occurs because in many marriages the husband or wife will hold certain property before marriage and instead of changing it to be community property they continue to hold it as separate property during the new marriage. Under these facts, the separate property does not pass completely to the surviving spouse. Unfortunately I have had more than one client come to me in this type of situation and there is nothing they can do to keep the property from passing directly to the children of the marriage, the children from a prior relationship, or to the decedent’s other family members. If a beneficiary is a minor as well (under the age of eighteen in California), then this can add the extra expense of a proceeding to appoint a guardian over the estate of the minor. This reason alone is why it is very important to not only have a will in place, but also to avoid the Court system entirely by doing proper trust planning.

I will be writing several posts on this topic regarding the intestate provisions of the California Probate Code. If you have questions about how your own estate would be distributed under these provisions, do not hesitate to contact me to discuss them.

Bonds and Independent Administration in California Probates

In my last post on California Probates I went over several reasons why the probate system in California is not the preferred way to transfer wealth to your beneficiaries. Even with those shortcomings, many people choose not to do any planning during their lifetimes and they instead decide to either pay for a simple will that follows the statutory formalities or to do a holographic will (a will entirely in that person’s handwriting as authorized under section 6111 of the California Probate Code). The main reasons for this is that they either do not want to spend the money during their lifetimes or they feel that the problems with the probate system will be changed before they pass away. Either way, those people are continually looking for ways to improve their personal representative’s experience during the probate process. Here are a couple of issues for a person to consider when they are doing their simple will or a will in connection with a comprehensive estate plan.

First, as noted previously, many judges will honor a decedent’s request to waive bond if they explicitly indicate this in their will. The individual must waive bond for any of the named personal representatives to act. This will in many cases eliminate the need for the estate to spend thousands of dollars per year on an insurance policy that is not needed in many of the estates. Otherwise, if the bond is not waived, the court will generally require the bond and if the estate cannot pay for this cost, then assets will need to be sold in order to satisfy the payment. I have also seen a judge require a bond in a probate where the will explicitly waived bond. The reason in that specific case was that none of the named individuals in the will wanted to act, so they either had a different relative act in that capacity or a public fiduciary was appointed by the Court. Either way, the judge decided that the will only waived bond for those specific named individuals, so make sure that you name enough alternative personal representatives to make sure that one will act. Also, you will want to make the bond waiver language extremely broad if you want the Court to waive the bond.

Second, in California there is a section of the Probate Code beginning with section 10400 that is called the Independent Administration of Estates Act. This section allows a personal representative to do many things during the administration of the estate without going to court for approval on each individual action. At the end of the probate when the final petition is filed, the representative must disclose what actions were taken under these powers, but as long as the representative acts within the powers under these sections, the result is that the entire process takes much less time (especially in those counties where there is only one probate court that handles a great number of probate cases, such as Orange County). The probate code indicates that any personal representative can petition the court for these powers unless the will indicates that the estate may not be administered pursuant to these provisions (California Probate Code section 10404). However, my personal experience has shown that some judges will not allow these powers to be used unless the decedent gave express authority to administer the estate under these provisions in their testamentary will. The only potential downsides are that your personal representative can take actions under these provisions without immediate Court approval (so make sure you pick a trustworthy person for your personal representative!), and some judges will only allow these powers to be granted if the personal representative posts a bond, thereby allowing more flexibility but increasing the expenses to the estate (I haven’t experienced this in Orange County, only in Los Angeles County). Therefore, if you want your personal representative to have the most flexibility, your will should expressly authorize all of the listed personal representatives to act under the Independent Administration of Estates Act.

In closing, please note that if you are concerned about security over flexibility for your heirs then you may not want to waive bond and you may not want your personal representative to have the independent administration powers. In my experience with the estates that I have handled, the clients overwhelmingly want more flexibility than more security when they understand what the bond costs and how the independent administration can speed up the process. However, there are many situations where there are family conflicts and issues that parents can foresee between the beneficiaries. In these situations a bond and requiring the longer Court procedures may be the best option available. If you have further questions about how these decisions can affect your estate and your family, contact your attorney to discuss the matter or email me at zieboldlaw@gmail.com or mziebold@ferruzzo.com.

Starting with a new Firm

Many of my readers have emailed me and asked why I have not posted over the last month. For those of you who do not know, I have accepted a job offer with the law firm of Ferruzzo and Ferruzzo in Newport Beach, California. I will continue to practice in the areas of Estate Planning, Probate, Taxation, Partnerships and Corporations with my main focus being on estate tax planning for the high net worth individual. My new contact information is as follows:

Ferruzzo and Ferruzzo, LLP
3737 Birch Street, Suite 400
Newport Beach, CA 92660
949-608-6900 (phone)
949-608-6994 (fax)
www.ferruzzo.com