Friday, June 27, 2008

The California Probate System and Why it Should be Avoided.

Potential clients often ask questions about what the California probate process is and why they would want to avoid it. Simply stated, a probate is the Court proceeding where a decedent’s debts are settled and the remaining assets are distributed. If the deceased has no will, this distribution would be handled pursuant to the intestacy provisions of the probate code. If there is a will, the assets are distributed pursuant to those instructions. The good news is that there is a procedure under section 13100 and following of the California Probate Code that allows a person’s estate to avoid the probate process if it is under a certain amount. The bad news is that the limitation is $100,000, which means that the majority of estates in Orange County will go through this process. In these cases where the estate must go through the probate process, the family or heirs will mostly likely be left in a worse position than they would be if other planning had been done. The below reasons describe why it is ideal to do at least some basic estate planning if your California estate will be over $100,000.

The first consideration is the time involved to complete a probate. I do most of my probate work in Orange County where there is one probate court for the entire county (of over 3 million people). This means that your hearing will often be set at least six to eight weeks after the date you schedule it and occasionally longer if the court has a backlog of cases. In my experience, a simple probate generally takes more than a year to finish, and if there are multiple creditor issues, complex sales of estate assets, or fights involving the beneficiaries this estimated time may be extended to more than two years. In some other counties, such as Los Angeles, there are multiple courts that handle these proceedings and the time to complete the probate may not be as long.

The second issue is that everything in a probate is part of the public record. This means that anyone can go to the courthouse and find out the value of the assets involved, which beneficiary received those assets, and at a minimum the name and mailing address for those people. If you want to keep the contents of your estate and who inherited what confidential, the probate system must be circumvented.

Third, in many instances the court will require the personal representative of the estate to obtain a bond over the probate estate. A bond is an insurance policy that provides monetary compensation to the beneficiaries of an estate if the personal representative misappropriates the assets. Unfortunately, on a million dollar estate, they can cost several thousand dollars per year. If the Court orders a bond, it must be obtained and paid for by the estate. The good news with this is that you can waive this requirement in your will and in many instances the Court will honor your wishes. However, the bad news is that even in those instances where the will waives bond and all of the beneficiaries waive the requirement, the Court still has the authority to require one. I have personally represented an estate where all of the beneficiaries waived this requirement and the Judge in that probate proceeding decided that he wanted a bond in that case anyway. This ended up costing the estate over two thousand dollars per year during the probate.

Fourth, there are high costs involved in administering the probate itself. The Court filing fees in California are charged on a sliding scale based on the value of the assets within the estate. Then there are additional fees for the probate referee, who must value the assets in the estate for the court, fees to the attorney for the estate, and the fees to the personal representative. These fees are set by statute, so no attorney can charge more than this, and I am unaware of any attorney who will accept less to handle a probate.

California Probate Code section 10800 provides the compensation of the Personal Representative and section 10810 provides the compensation for the attorney. They mirror each other, so effectively what is paid to one person is paid to the other as well, unless one waives their right to compensation under that probate proceeding. The statute states that for “ordinary services," the estate will pay to each person the following:

  • 4% of the first $100,000
  • 3% of the next $100,000
  • 2% of the next $800,000
  • 1% of the next $9,000,000
  • .5% on the next $15,000,000
  • A reasonable amount determined by the Court for any amount over $25,000,000

As you can tell, on a simple million dollar probate (which could easily be just a personal residence in Orange County), the fees to be paid to the attorney and the personal representative for ordinary services are $23,000 each. This figure does not include any services that are not considered to be ordinary in nature, for which both are compensated over this amount. In this case, the total costs could be over $50,000 before the probate is complete. If the majority of the estate contains real estate or other illiquid property, the heirs are either forced come up with the money to pay these substantial fees or the estate assets will be sold through the process to pay the fees.

Based on the cost alone, it makes sense for most people in California to avoid probate. All of this can be avoided for a much more reasonable cost with some simple estate planning, such as the creation of a revocable trust.

Monday, June 23, 2008

What is Estate Planning and Why Should I Consider It?

Most people that hear I do estate planning predictably respond, “I don’t have that many assets, and my family knows what I want when I die. I don’t need to do any estate planning.” Usually, these individuals have never had a major family conflict after the death of a love one and have never gone through the probate process in California. Once they experience one or the other, people generally find that the court proceedings leave the beneficiaries of an estate much worse off than they would have been with some basic planning. A well-known maxim is “if you are failing to plan then you are planning to fail.” Too often that saying comes true for families that do not take the time to do proper estate planning. Estate planning protects the assets you have worked hard for and protects your family from additional burden in a time of grief.

Once proper estate planning is completed, the client and his or her family will experience several benefits. Typically, estate planning will provide for the most efficient transfer of wealth, reducing the amount of time, fees, taxes, and burden that the family must endure. For most people in California, this planning is first focused on probate avoidance, as the probate process is long and expensive. Higher net worth clients in California and other states should also do estate and gift tax planning to ensure that their wealth passes to the chosen beneficiaries with the least amount of transfer taxes. For every estate plan, regardless of where a person lives, there will be many different considerations involving several areas of the law.

Depending on the family, these different statutes may apply: Probate Law, Trust Law, Corporations Law, Partnership Law, Federal and State Tax Law, Laws regarding Asset Protection, Bankruptcy Law, Property Law, and Family Law. A well-prepared plan should protect the client from the adverse consequences of any and all laws that could apply to them. This blog will deal with issues from all of these areas of law in the states where I am licensed (currently California, Nevada, and Arizona). I hope that you find some of the answers that you are looking for. If you have questions that are not answered in these posts, feel free to contact me at and we can discuss your question in greater detail.