This OUTLINE: What is it and what is it not.
This manual is a brief overview of what probate proceedings are about. It cannot, by its short nature, cover all things that a probate is. It isn't intended to teach you how to do a probate as though you were the attorney. Much training and experience goes into that. It is, however, intended to help you see the path that a probate might take you with my guidance. I hope that it helps.
1. Probate - What is it? There are two methods of distributing property from a decedent to the heirs or beneficiaries:
1.1. Through probate, and
1.2. Through non-probate techniques.
Probate is designed for court supervision of passing assets from the decedent to his heirs, or (if he leaves a Will) to his beneficiaries named in the Will. Non-probate assets pass directly to the beneficiaries or heirs. Examples of non-probate passing of assets are: 1) Totten trust accounts in banks, savings and loans or credit unions, 2) trusts, 3) joint tenancies, 4) life insurance proceeds (when payable directly to a beneficiary), and 5) "normal" assets if the total of those assets are so small that, under law, a probate proceeding is not required. So, generally assets which stood in the decedent's name alone must pass to the heirs or beneficiaries only with court supervision. It is a process of supervised gathering, inventorying, accounting for, and distributing of assets of the decedent.
2. Purpose - Protection of Heirs/Beneficiaries and Property. The purpose of a probate proceeding is to protect the creditors and the "heirs" or beneficiaries from having quick and unscrupulous individuals descending upon the decedent's property and making off with it illegally. The process involves three primary steps: 1) to identify who is going to get it (who really are the heirs, descendants or persons named in the Will), 2) identifying what really are the assets of the decedent (to collect and identify all assets so that some assets can't accidental slip through the fingers of the heirs and pass out to others not entitled to it), and 3) to supervise the handling of that property (including using it to pay creditors that have timely processed their claims) and its investment for production of income pending distribution (and then the distribution itself).
Without the supervision of the court, an estate is ideal for an embezzler: everyone is usually emotionally distraught and frequently the decedent dies without a surviving spouse who already lives at home to protect the assets. Relatives or even strangers could descend upon an unoccupied house and just simply make off with assets. The purpose of probate is to assure that the people who are entitled to the property of the decedent do actually receive it.
3. Authority of Personal Representative - Executor or Administrator.
3.1. The personal representative (either an Executor named in the a Will or an Administrator, when there is no Will or the Will does not name an executor who is willing to act) is the one and only person charged under law with the authority to deal with the property of the decedent. No one else is allowed to rent property, sell property, collect property, inventory property, distribute property or otherwise deal with it. It is into the hands of the personal representative that the court entrusts the proper handling of the decedent's estate from the beginning of probate to the end.
3.2. Generally, the law provides that the personal representative shall buy a bond before Letters will be issued by the Court, which protects the estate from the personal representative's malfeasance. The only times that a bond may be waived is when the Will says that it shall not be required or when all beneficiaries (and sometimes all creditors) waive it. Sometimes the Court requires the bond even if the Will waives it.
3.3. The personal representative named in a Will does not have the authority to begin acting on behalf of the estate until he is appointed by the court to act. Merely being named in a Will does not instantly give the right to function on behalf of the estate. Since it takes at least a month to give notice to all the heirs and have a hearing and become appointed by an Order of the Court, followed by the issuance of Letters, certain things frequently need to be done on behalf of the estate even before the appointment occurs.
3.4. In those cases where the speed to act is quite important, it becomes necessary to file a petition to become a special administrator. A special administrator is one who is temporarily acting to save the estate from disastrous consequences until the later appointment of the full personal reprentative. A good example of an instance where special administrator status is frequently requested is where an ongoing business requires continued attention pending the hearing on the primary probate estate (collection of rents, for example). A sole practitioner professional, such as a physician or an attorney, certainly leaves behind a very valuable asset: his/her practice. Yet this asset will quickly diminish in value if a substitute physician or attorney is not found to step in and retain those clients' activities pending the sale of the practice to an outside professional. However, the named personal representative, until appointed, is not legally allowed to hire a physician or an attorney to take over that practice. Thus, a special administrator would be required in order to hire such an individual.
3.5. The authority of a personal representative, once appointed, is not unrestrained. The personal representative may not sell any assets (or especially give them away) except under certain circumstances. Generally, do not take action on behalf of the estate without first consulting me each step of the way, but especially do not sell any assets without first consulting with me. Similarly, investments of assets, rental of assets, and entering contracts should also be done only after consulting with me.
4. Heir or Beneficiary Identification. One of the first duties of the personal representative is to identify who is to receive the assets. If the decedent left a Will, one would think that this task would be quite simple, since it would seem you would not have to track down the blood line heirs-at-law. Not so: you still have to track them down so as to give them notice of the proceedings so that they will have "due process" and a chance to contest the Will. If the decedent did not leave a Will, then of course the heirs have to be found. They are determined under the Probate Code by a chain of "next of kin" sequences. It is thus necessary to determine the family tree of the decedent. Where the decedent left close family members, this is many times easy. As mentioned before, so that heirs who are cut out of the estate by Will may have an opportunity to challenge the validity of the Will, California law requires that all "heirs" be identified even if there is a Will. So the blood line family tree must be prepared in every instance whether or not the decedent leaves a Will naming other people. This task must be completed very quickly.
5. Division of labor between the attorney and Personal Representative.
5.1. The Court will eventually award "statutory" fees to each the attorney and the personal representative (unless the representative waives his/her fee). They each are entitled to receive the same amount and are each expected to perform the expected services in exchange therefor (even if the Personal Representative waives the fee). The amount is computed as a declining percentage of the value of the estate at death plus income and gains on sales, less losses on sales. The percentage looks like this:
|4% of the lst||100,000.00|
|3% of the next||100,000.00|
|2% of the next||800,000.00|
|1% of the next||10,000,000.00|
|0.5% of the next||25,000,000.00|
and Court discretion on the value in excess above that.
So for an estate of $170,000.00, the fees would look like:
Basis for Fees computation:
|Inventory and Appraisement||170,000.00|
|Plus Receipts during administration||9,000.00|
|Plus Gains on Sales||5,000.00|
|Less Losses on Sales||0.00|
|Net basis for computation:||184,000.00|
Thus the Estate Fee founded upon that Net Basis of computation would be:
|4% of the lst||100,000.00||=||4,000.00|
|3% of the next||84,000.00||=||2,520.00|
|2% of the next||0.00||=||0.00|
|1% of the next||0.00||=||0.00|
|0.5% of the next||0.00||=||0.00|
Thus the sum of $6,520.00 would be awarded each to the attorney and to the personal representative. The Court and the law expects the recipient to have done certain things to have earned this statutory fee.
5.2. In addition to the statutory fees, each of the personal representative and the attorney may ask the Court for permission to be paid extraordinary fees for extraordinary tasks outside the statutory tasks. As a result, it is good to understand just which tasks are statutory and which are extraordinary. That way, you can keep track of how much time you spend on each on separate sheets of paper (one sheet for each separate type of extraordinary task). You will need that information in order to meaningfully apply to the Court for permission to be paid extraordinary fees. There can even be a motive to keep track of the time you spend on the statutory tasks, in case the Court wants to inquire as to whether the amount of the statutory fee has some "slack" space in the work performed for that fee so as to potentially "cover" some of the extraordinary time spent.
6. Personal Representative's tasks: Statutory vs. Extraordinary.
6.1. Statutory Duties of Personal Representative.
6.1.1. One of the earliest statutory tasks of the personal representative is the gathering of the information about the persons entitled to notice of the probate proceeding. Tracking down all those names, addresses, and where obtainable, their phone numbers and social security numbers, can be a formidable job. If necessary, ask the attorney for guidance.
6.1.2. It is one of the primary duties of the personal representative to collect and inventory assets, invest and shepherd them pending probate, pay the validly processed Creditor's Claims, and make prompt distribution to the heirs or beneficiaries. It is not contemplated that a probate estate be a long standing entity which continues to be a title holder over years and years. It is expected that the personal representative would strive to diligently bring matters to a close, wind up the estate, account to the court and close. In that regard, the personal representative must first collect, identify and inventory all assets that belonged to the decedent.
6.1.3. Another initial duty is the determination of debts of the decedent, including all related data of names, addresses, account numbers and balances related thereto. This information should be delivered to the attorney very early in the probate so that "Notice to Creditors" can be given as required by law. The giving of that notice is one of the attorney statutory tasks.
6.1.4. After having done that, the personal representative must continually monitor and account for all income and outgo and flow of assets from one character to another pending the probate. Continuous reporting to me about that activity is important, as I can catch and correct errors in behavior innocently made.
6.1.5. It is also the duty of the personal representative to prepare income tax returns both for the decedent (IRS form 1040 and California form 540) and for the estate (IRS form 1041 and California form 541) as necessary and the estate tax return if applicable (IRS form 706 and parallel state form).
6.1.6. In that regard, collection of non-probate related data is always necessary. If the estate is insufficiently liquid to pay for the costs of administration and discharge debts of the decedent, under my supervision sales must occur with the personal representative participating. Efforts at sales are extraordinary tasks. After all taxes are discharged, liens and debts are paid and the estate is in a position to distribute, it is the duty of the personal representative to provide enough data and in the appropriate format so that the attorney may prepare the final report and account of the estate to the court in conjunction with a petition for distribution.
6.2. Extraordinary Duties of Personal Representative.
6.2.1. One of the most common extraordinary task that the personal representative will encounter is the sale of estate property. Time spent "shopping" for a realtor, meeting with the realtor to discuss listing price, talking with the attorney about every aspect of the sale, including negotiating counter offers to offers received, attending court hearings to confirm the sale, and finalizing the escrow closings are all extraordinary fee compensable. Keep track of the time. If you spend time on different sales of different assets, track them on separate sheets.
6.2.2. Another common extraordinary task is the actual preparation of income tax returns. While it is a statutory task to get them done, it is probably an extraordinary task to do them yourself. In other words, if you hire them done by a tax preparation service, you still have to supervise their work and supply them with the data to do the work. This is a statutory task. If in addition, you are the preparer who actually do the returns, then you are entitled to an extraordinary fee for doing so.
6.2.3. If you spend time collecting rents, maintaining lawns by watering and mowing, and other tasks such as this, these are extraordinary tasks. Keep track of each separate kind of task on different sheets of paper, because the Court might compensate different tasks at different hourly rates. Some are inherently more valuable than others.
7. Statutory Duties of Attorney.
7.1. It is the duty of the attorney to guide the personal representative through the morass of legal technicalities of this, one of the most complex of all legal fields.
7.2. The attorney prepares initial petition to the court, modifies and organizes accounting data supplied by the personal representative into appropriate form for the inventory and accounting.
7.3. As a practical matter, the law office frequently ends up doing some of the accounting work that is technically the duty of the personal representative. In most cases, the attorney will do this without insisting that the personal representative agree to share some of the personal representative's statutory fees for doing so. In this regard, however, the personal representative is expected to help the attorney by supplying detailed data in the form and pattern required by the attorney about the flow of assets during the pendency of the probate estate. It cannot be over-stressed that the probate procedure in California is very complex and picky as to detail. It is better to consult with me if you have a question, than to act and have it be wrong.
7.4. The attorney will give notice to creditors (from data supplied by the client) and potential creditors and track the Claims filed and prepare Approval/Rejection forms for the client.
7.5. The attorney will prepare and file opening and closing tax forms (Notice of Fiduciary Relationship) to the appropriate governments.
7.6. The attorney will format accounting data in the manner required by law and court rules.
7.7. The attorney will prepare the accounts, reports and petition for distribution for filing with the court and attend hearings necessary for clearing such. All necessary supplements and discussions with probate clerks/attorney are included in this task.
7.8. The attorney will generate the inventory and appraisal from data supplied by the client.
8. Extraordinary Duties of Attorney.
8.1. Like the personal representative, the attorney can seek extraordinary fees for efforts associated with sales. This includes all time associated with talking with brokers, reviewing offers, drafting counter offers, preparation of petitions to confirm the sale, drafting the personal representative's deed, attending the hearing, negotiating escrow instructions, supervising the escrow closing statement for non-conforming entries, etc.
8.2. When the attorney supervises or assists in the preparation of tax returns required of the personal representative, such is an extraordinary task. Even the brief review of the return, prepared by a professional preparer, prior to its filing, so as to make sure that it is done right, is compensable by extraordinary fees.
8.3. Still other extraordinary tasks include Family Allowance, Preliminary Distribution, Estate Tax, Fiduciary Tax & Other Taxes, Special Creditor's Claims, Will Contest or Heirship Litigation, Other Litigation & Special Efforts at Asset Collections, Spousal Property Petition, Interface with Ancillary Probate, Negotiation of In Kind Distribution, Clearance of Title Problems, Trace Heirs and Special Administration.
9. Collection and Inventorying of Assets.
9.1. One of the very first duties of the personal representative is to collect and inventory assets of the decedent. Collection means just that. Physical possession of the assets exclusive to the access of outsiders by way of keys or otherwise is crucial. One of the duties of the personal representatives to protect the assets from disappearing by theft. Theft from "heirs", more distant relatives, or absolute strangers is not uncommon and the personal representative can be held personally liable for losses of that sort. Assets of the decedent in possession of others should be collected from those others and grouped with other assets and put in a safe place. If these outsiders refuse to deliver possession to the personal representative, I can assist with legal action to bring it into the personal representative's possession.
9.2. A written thoroughly detailed description of each asset of the estate must be prepared on an Inventory and Appraisal form to be valued by an appraiser (called the Probate Referee) and filed with the Court. This must, under law, be done promptly. At this stage, distinguish between assets of the estate and assets which pass other than by probate. Assets of the estate are all those assets which did not have probate avoiding techniques of title, such as joint tenancy, trust, or Totten trust. Simple examples might be furniture, jewelry, cash and coins, money in bank accounts, real property, cars, stocks, bonds or other assets of title wherein the decedent's name appears by itself or with others without the joint tenancy or trust form. These are the assets which belong to the probate estate. The other assets pass directly to the joint tenant or trust beneficiary and, while they might still be estate or income taxed, they do not pass through the supervision of the probate court and are not inventoried as such. As a matter of careful practice, it is better to identify everything for me and tell me your opinion that it is joint tenancy and let me concur with you, rather than to delete it and later find out it had to be probated.
10. Collection of Data about Non-Probate Assets.
10.1. For estate tax purposes (form 706), even though California repealed its inheritance tax (form IT-22) on June 8, 1982, a return might be required to be prepared inventorying not only those assets which pass through the probate estate, but all other assets which would be taxable as well. It will be required if the "estate taxable" estate is large enough (amount changes from time to time) so that it involves a federal estate tax return. This non-probate data includes insurance proceeds paid from policies directly to beneficiaries, assets in Totten trusts, assets passing outside of probate by revocable or other family trusts, and joint tenancy assets including real property and bank accounts.
10.2. As to both the probate and non-probate data collection process, it is easy to be confused as to the value on death. In this regard, distinguish between dividends and interest which accrue after the date of death from the interest or dividends which accrued before death but may not have been paid to the account of the decedent before death. Thus, the balance of a savings account may show $100.00 on the date of death, however, interest for a part of a month through the decedent's date of death will have accrued and that is an asset of the estate even if it has not been posted to the passbook. This is called Income in Respect of Decedent. Similarly, the right to pursue accrued but unpaid rent income on apartment units, even though not yet collected, are assets of the decedent's estate.
11. Accounting. Probate accounting is a very important part of the court procedure which we must follow. The court requires an accounting of all income and outgo which occurred after the death of the decedent. Hopefully, it will be a fairly simple task since you will open an account just for the decedent's estate and only you will be handling the transactions of the account. It is your responsibility to keep accurate records of transactions which occur. You should reconcile the bank statement each month (a statutory task) so as to catch any arithmetic errors, to post any interest and so you will know which checks are outstanding. If you keep accurate records, it will make it much easier for us to provide an accounting to the court without having to figure out why it doesn't balance. The original bank statement might have to be supplied with interim accountings so the court can be sure that the balance we state in the account actually is the balance. If the estate is open for a long period, then more than one accounting will be tendered to the court. Efforts at repeated Accounts and Reports to the court are extraordinary tasks. A hearing is scheduled for the court to review and approve or disapprove of the transactions conducted within the Account and Report.
12. Tax Returns - 1040, 540, 706 ,1041, 541. Two kinds of income tax returns must be filed with the IRS and the FTB. One kind includes the 1040 (Federal) and the 540 (State) individual returns. These forms are filed on behalf of the decedent, since he/she probably had some kind of income for the fractional year before death and such income needs to be reported on the 1040 and 540 returns. The second kind of tax return includes the 1041 (Federal) and the 541 (State) fiduciary return. These forms are filed on behalf of the estate. Even after the decedent's death, there will still be income from miscellaneous sources, such as interest from bank accounts, dividends, rent, etc. It is your responsibility to make sure that these tax returns are filed promptly so as to avoid any interest or penalties. There is one other tax return which is only filed if the "estate taxable" estate is valued at over a certain threshold (which changes from time to time). This tax return is called the 706 return or Federal Estate Tax Return. However, no tax is due on estates smaller than the threshold amount. The voters repealed the California Inheritance Tax on June 8, 1982. For these various reasons, we will need Social Security numbers for the decedent, for you and for each heir or beneficiary.
13. Investing and Protecting Assets. You have the authority and duty to invest assets for the estate, i.e. make them income producing. However, caution must be taken so as not to squander or lose money for the estate. You should always check with me first before you invest in any asset. It is your responsibility to protect assets of the estate. If the decedent had a car, don't you or others drive it. If there were an accident, it could cause big problems. Don't give the decedent's property to any one until it is time to be distributed. We must obtain a receipt from them stating they received such property. You will undoubtedly have questions in this regard; it is better to ask me than to just go ahead and maybe cause a costly delay in the closing of the estate (or worse).
14. Sales. When the Personal Representative does not have "Full" IAEA (Independent Administration of Estates Act) powers, then there is a court procedure which must be followed pursuant to the Court Rules to sell real property. To sell real property, we generally must first publish a Notice of Intent to Sell Real Property in the newspaper. Next, after we have adequately exposed it to the market (typically by a listing with a broker) and we accept the offer of the highest or best bidder, we petition the court to confirm the proposed sale. At this hearing anyone may attend to "overbid" the price already bid. The personal representative and attorney must attend this hearing. The bidding process in open court is a lot like an auction with the Judge as auctioneer. The winning bidder (frequently the initial bidder) then gets the house after a normal escrow. To learn more about real property sales, click here. The personal property may also be sold. Depending on the value of the asset, it may also need to be petitioned and approved by the court before sale. Do not sell any property of the decedent without permission and supervision from me or the court.
15. Closing and Other Hearings. Only after all taxes have been paid, the creditors have had their four month chance to "speak now or forever hold your peace" and such creditors have been paid or provided for, and the estate is otherwise "ready" to close, may you petition to close the estate. Before the estate can be closed, a final account and report must be filed with the court. This document summarizes all the transactions which have occurred relative to the estate. It states who the personal representative is, the date he/she was appointed, the decedent's date of death, the sale of assets, problems which arose and how they were solved, and summary of the accounting, which is called a recapitulation. You must file an accounting every year that the estate is still open. If it is necessary for these intermediate accounts to be filed they are called, "Accounts Current". Other hearings may be necessary for miscellaneous matters. Such hearings may be for the sale of real property or perhaps to allow preliminary distribution to one of the heirs or beneficiaries.
16. Distribution and Release. After everything is completed, among the last few things that need to be done are the distribution of the assets to the heirs or beneficiaries and the release of you from further responsibility for the estate. The distribution process involves obtaining receipts from each heir. This receipt states what they received and that they have received everything they were entitled to receive. This document is then signed and dated by each heir. After signature, you may distribute that heir's share of property to him. The final step is to prepare a final discharge and order. This document is filed with the court and then a copy is sent to the IRS.
17. Supervision by the Attorney. Suffice it to say that I would like you to allow me to guide you along every step of the way! I hope to make you feel assured in your role as personal representative. Please help me do that by consulting my office before you take any steps in handling the estate. Prevention of errors goes a long way in avoiding problems that can be messy to solve otherwise. If you have a question, call us! We are here to help.
18. Computer Software Compatibility. If you have a computer, talk with us about methods of making both our jobs easier. We have developed some ways to do that. Let us know what software/hardware you have and we'll see what we can do.