When purchasing any real property, one must not ignore the importance of how the property is titled. Many will simply check the box next to the form of title they hear the most, without really knowing what it means. However, the way title is held may have consequences several years down the road and could subject one’s heirs to significant costs.
In this article, our focus is on probate and how title may determine whether we avoid or are subject to probate.
Probate is a court proceeding initiated to administer the assets of a deceased person. In California, a deceased person’s estate exceeding $150,000.00 will require a formal Probate proceeding. (California Probate Code Section 13100).
Formal probate is usually initiated by the executor, who is often the deceased person’s next of kin. The executor must file a “Petition for Probate” in the superior court where the deceased resided. Along with the Petition for Probate, the executor must also submit the will to the court for administration. There are also notices to beneficiaries and creditors, as well as appraisals of the estates’ assets that must be performed as part of this formal Probate.
It should be noted that any real property in probate must be appraised by a court-approved appraiser. Also, an executor must obtain permission from the Probate Court to sell any real property. (California Probate Code section 7261).
While Probate seems like a simple court proceeding, it can take months or even years to administer an estate. Also, while an attorney is not required, one is often retained to assist the executor in navigating the Probate process. Further, the California probate code establishes a statutory attorney fee, which is a percentage of the value of the deceased person’s entire estate. (California Probate Code Section 10810). With real property likely the largest asset owned by a deceased person and considering the value of real property in California, it is not unusual to see a Probate estate pay $30,000.00 in statutory attorney’s fees. It should be noted that executors are free to negotiate an alternate fee with the probate attorney.
Considering that the time and cost to probate a deceased person’s estate can be significant, every effort should be made to avoid probate, starting with the titling of your real property.
How you title property will first depend on the number of owners. If a property only has one owner, there are a few options. A single owner will not want to title the property as a single person because when they pass away, the property will certainly have to be probated. The most common title options for a single owner to avoid probate is to set-up a trust or file a transfer on death deed.
The trust is the “old faithful” of probate avoidance. It avoids probate by having the owner make a lifetime transfer of the real property into the trust. When the owner passes away, the trust continues to hold the property and there is no need to Probate. Additionally, the trustee can transfer title of the real property to a new owner designated in the trust document, again, without the need to probate. Procedurally, you only need to file a trust transfer deed or similar to show the property is held by a trust.
If a trust does not appeal to you or the cost of setting up the trust is undesirable, you should consider filing a transfer on death deed. California Probate Code section 5642, allows an owner to name a beneficiary by filing a transfer on death deed. What this means is that upon the passing of the owner, the real property will transfer to the beneficiary in the deed, avoiding probate.
Turning to property owned by multiple owners, there are a few ways to title your property. Similar to the single owner, real property owned by multiple owners can be placed in a trust. If one of the owners dies, the owners follow the terms of the trust, but certainly, there is no need for Probate.
In addition to the trust, real property with multiple owners can be owned in joint tenancy. The significance of joint tenancy is that if one owner passes away, their interest is redistributed among the remaining owners, avoiding probate.
Much like the single owner, the property of multiple owners can be placed in trust and avoid probate in the same way you would with a single owner.
One option unique to married couples is community property with the right of survivorship. The effect of community property with the right of survivorship is almost identical to joint tenancy, but it has favorable tax treatment for the married couple who holds the title in this fashion.
As you have seen, there are several options for holding property that avoids probate. The first step in choosing the form of title that is right for you is first knowing your option.