San Jose Estate Planning Attorney Blog

Avoiding Probate is often a key goal for clients in their estate planning.  This article will give you eight examples of property that passes directly to your beneficiaries without the need for probate.

1.   Property Passing Outright to the Surviving Spouse

California has a very simple probate procedure for property that passes outright to the surviving spouse.  The spouse may file a Spousal Property Petition with the probate court.  If no one objects, the court will generally grant the petition and the property will ordered to the surviving spouse.  We commonly do these for estates where the first spouse died without a Will or a Trust.  Under California law, under those circumstances, the surviving spouse would get all of the Community Property and a third to half of any Separate Property of the deceased spouse.  The Spousal Property Petition avoids the need for the lengthy and expensive probate process most client's dread needing.

2.   Estates of Less than $150,000 in Value

Small estates do not have to go through the full probate process.  A Section 13100 affidavit is given to the institution holding the property.  Upon receipt of the affidavit, the institution will turn over the asset the Personal Representative for distribution to the proper beneficiaries.  You cannot do a 13100 affidavit, however, if the estate consists of any real property, no matter the size of the estate.

3.   Assets in a Trust.

Generally, assets that are in a Trust do not pass through probate.  The Trust terms declare who is to receive the property when the Trustmaker's pass away.  The Trustee follows the terms of the Trust and distributes the property to the Trust beneficiaries.

4.   Life Insurance

If there is a valid beneficiary designation the life insurance will be distributed to the beneficiaries named on the designation.  The life insurance contract governs who the beneficiary will be, so there is no need to probate the life insurance policy.  However, if there is no named beneficiary of the policy, then the insurance company will usually require that the policy be included in the probate so they know who should get the death benefit of the policy.

5.   Retirement Plans and Annuities

In the same way that life insurance usually avoids probate, retirement plans like your 401(k), 403(b), etc. avoid probate if there is a valid beneficiary designation.  Avoiding probate of the retirement plans is especially important due to the negative income tax consequences of having the probate estate as the recipient of the plan proceeds.

6.   Bank and Brokerage Accounts

Most financial institutions offers the ability to use a beneficiary designation on the account.  This will cause the account to pass to the named beneficiary and avoid probating the account.  Sometimes these are called “Pay on Death” designations.  Other times, they may be called “Totten Trusts.”

7.   Buy-Sell Agreements

In a Buy-Sell Agreement, the owners of a business agree among themselves to purchase the ownership interest from any owner who passes away.  This allows the business to continue operating the way it has in the past without interference from the spouse or children of the deceased owner.  In exchange for purchasing the ownership interest, the surviving business owners pay the deceased owner's beneficiaries in cash or in kind.  These payments are made directly to the beneficiary and avoid probate.

7.   Property Held as Joint Tenancy

If you own property as Joint Tenants, title to the property will pass to the remaining joint tenants on the death of one of the joint tenants.  I would not advise using Joint Tenancy as your method for transfering property outside of probate without consulting a lawyer to work out the potential problems and unintended consequences that can occur.  Certainly, do not expect that if you name one of the children as the joint tenant that you are leaving the property to all of the children.  The property passes by law to the surviving joint tenants, not all of the brothers and sisters of that joint tenant.

The State of California has increased the amount that may pass through the Small Estate procedure by affidavit.  The amount is now $150,000.  This is a much needed increase from $100,000 previously.

The Personal Representative may now transfer Probate Estates less than $150,000 without the need for court petitions and supervision.

Two weeks ago I wrote about the unique rules for decedents dying in 2010.

On Tuesday, the IRS gave another well needed extension to Fiduciaries who are responsible for filing tax returns for decedents dying in 2010.

As you know, Congress changed the tax code on December 17, 2010, creating confusion and complications for both the IRS and the estate tax attorney's, CPA's, and Enrolled Agents who work with Fiduciaries needing to be in compliance with the new law.

Here are the new deadlines you need to know.

Form 8939, the form to allocate Carry-Over Basis, for decedent's electing out of the $5,000,000 exemption, will now be due on January 17, 2012.  This is a change from a couple of weeks ago where they announced a November 15, 2011 filing deadline.  No statement or filing is required for this change. The IRS, however, is saying that extensions will only be given

For the 706 estate tax return, if you file a timely 4768 request for extension, you will have until March 15, 2012 before the return needs to be filed.  Interest will be charged, however, for failure to pay any tax owed on time.

Details are in Notice 2011–76.

By the way… There is still a September 19, 2011, deadline to disclaim property.

Bert Torres, a Palo Alto CPA, recently asked about the estate tax results for people who died in 2010.  If the decedent's estate is less then $3,000,000, does an estate tax return or the 8939 (Carry-Over Basis Form) need to be filed?

Answer:  When Congress changed the law on December 17, 2010, they modified the default rules that apply for decedents who died in 2010.

First, the traditional rules applying to estates prior to 2010 are the rules that will apply in 2010 itself. However, the estate tax exemption is $5,000,000 for 2010.  This means that all assets in the decedents estate (with the exception of IRD) qualify for a Step-Up in Basis.  No estate tax return needs to be filed for estates less than $5,000,000.

If the estate is greater than $5,000,000, you will need to file the estate tax return, pay tax on the taxable estate at the rate of 35%, and get your step-up in basis.

Second, Decedent's estates may “Opt Out” of the traditional rules on Form 8939.  Instead of paying estate tax, you may have an unlimited estate tax exemption.  However, you only get a limited amount of basis to allocate among the assets.

All estates may increase basis a maximum of $1,300,000.  An additional $3,000,000 in basis may be increased for property that is passing to the spouse.

The deadline is fast approaching to make decisions regarding 2010 estates.  Call the Sheffield Law Office if you have any questions or we can help in any way.  Our number is (408) 920–2500.

Tim McCrone, a CPA in Los Altos, asked me yesterday whether or not beneficiaries of a trust are required to be given notice. Like many answers Lawyers give, it depends.

California Probate Code Section 16061.7 requires the Trustee of any Trust to provide notice to the beneficiaries (and heirs) on the occurance of either of two events:

1. The Trust becomes Irrevocable.
2. There is a change of Trustee.

This means that you do not have to provide anyone notice if your trust is still revocable. But if you die, your trustee will have to notice the current and remainder beneficiaries.

Notice is required to your heirs (i.e. next of kin) so that someone doesn't fraudulently create a trust for you leaving all of your property to them without your children knowing what happened to it.

There are a couple of states, however, that do not require notice like California does. A few require no notice to beneficiaries at all. If you have a client that wants absolute secrecy, they can find it.