Nothing is immune from the far-reaching tentacles of the coronavirus pandemic. This includes the court system in each of the 50 states with the fallout varying by individual counties within each state. In California, all jury trials were suspended and continued for 60 days effective March 23rd.
When someone dies, his or her property is usually included in their probate estate. An estate must be administered by probate court. It oversees the payment of taxes and claims of creditors and distribution of remaining property and other assets to beneficiaries. The probate division of each state’s court system has jurisdiction over estates. In California, the relevant court is Superior Court.
Prior to the coronavirus pandemic, the probate process was notoriously long in many states. In California, it could take anywhere from six months to two years to conclude depending upon the size of the estate, individual assets, and unexpected issues.
The time frame for completing individual probates, including distribution of assets to beneficiaries, will likely be extended for the foreseeable future due to a backlog of cases. As an example, although the Superior Court of Alameda County in California resumed a limited number of hearings in probate matters on April 20th, it announced that the hearings would be conducted remotely and would be limited to emergency hearings and matters filed and scheduled before the March 17th Court closure.
Assets Subject to Probate
Assets subject to probate include all property titled in the decedent’s name without co-owners or payable-on-death and beneficiary designations, as well as assets payable to the estate. This includes bank accounts, investment accounts, vehicles, business interests, and real estate.
Beneficiary designations are commonly found on workplace retirement plans, IRAs, annuities, and life insurance. The disposition of these items is controlled by beneficiary forms that supersede beneficiary designations in other estate planning documents including wills and living trusts. Primary and contingent beneficiaries should be named and updated to reflect life changes such as marriage, divorce, birth, and death.
It’s critical to maintain and periodically review a list of retirement plans, IRAs, annuities, and life insurance policies to ensure that they will be distributed to intended beneficiaries without being subject to probate. Custodial agreements for workplace retirement plans and IRA accounts also need to be reviewed to increase the likelihood that beneficiary designations will be honored by individual custodians. A proper and timely beneficiary review will go a long way toward avoiding unintended consequences, including potential litigation in probate court.
In addition to a will, a revocable living trust should be created to provide for the disposition of assets without beneficiary designations that have been transferred to the living trust. This includes real estate and non-retirement assets, such as investment accounts and business interests. The procedure for transferring ownership of individual assets to a living trust varies by type of asset and financial institution when applicable.
In addition to the potential lengthy probate process, assets that are distributed to beneficiaries will be reduced by probate fees. This includes attorney’s fees, accounting fees, executor fees, court fees, appraisal and business valuation fees, bond fees, and other miscellaneous expenses.
Attorney and executor fees, which can be sizable, are legislated by individual states. In California, attorney and executor fees are identical. They’re both assessed as a percentage of the gross value of probate assets. In the case of real estate, the fee will be the same whether the property has a mortgage of $1 million or no mortgage.
California attorney and executor fees begin at 4% of the first $100,000 of probate assets, 3% of the next $100,000, 2% of the next $800,000, 1% of the next $9 million, and 0.5% of the next $15 million. A probate court judge can order higher fees in special circumstances and more complicated cases.
Most states exempt small estates from formal probate proceedings, using relatively simple transfer procedures. In California, estates valued at $150,000 or less fall under this category.
Incorporate Probate Avoidance in Your Estate Plan
As a general rule, probate avoidance should be one of the primary, if not the primary, goal of every estate plan. Proper initial and ongoing planning coordinated by a qualified estate planning attorney can avoid the delay and sizable expense associated with the probate process at an already challenging time in one’s life following the death of a loved one. This is especially important in light of the inevitable extended probate court delays that are likely to occur as a result of the coronavirus pandemic.
Robert Klein, CPA, PFS, CFP®, RICP®, CLTC® is the founder and president of Retirement Income Center in Newport Beach, California. Bob is also the sole proprietor of Robert Klein, CPA. Bob applies his unique background, experience, expertise, and specialization in tax-sensitive retirement income planning strategies to optimize the longevity of his clients’ after-tax retirement income and assets. He does this as an independent financial advisor using customized holistic planning solutions based on each client’s needs and personality.