Probate Estate
In California, Probates are required when the decedent’s assets are over a certain minimum threshold. That amount has changed over the years. For deaths that occurred on or after April 1, 2022, that amount is $184,500. The key, however, is in determining what assets are included in the Probate Estate and what are not.
What is not included is:
(a) any asset that passes to another individual by operation of law or contract via a beneficiary designation (i.e., life insurance, IRAs, 401Ks, pensions, annuities, POD – Payable on Death accounts for financial institutions or brokerage firms);
and
(b) any asset that passes to another individual by forms of title (i.e. property titled as joint tenancy, or community property with right of survivorship; or real property titled via a revocable transfer on death deed;
and
( c ) any property in Trust
All other assets would be in the “probate estate” if collectively they are over $184,500.
The fair market value of the asset is determined at time of decedent’s death. Further, as for real property, the full fair market value is included regardless of how encumbered the property is (i.e., a $800,000 home with a $500,000 mortgage is counted at $800,000, not just the $300,000 in equity, for “probate” purposes). Your probate fees and costs are based on the total value of your assets. The total of these assets constitutes your probate estate.
Trust Estate
Revocable living trusts are in vogue in California, primarily because they’re a cost-effective vehicle to eliminate the time, cost and publicity of a probate. However, the Trust must have assets in it to be effective. I have seen many beautifully crafted trusts with zero assets, making it useless or at a minimum requiring court intervention. The placing of the assets in the Trust is called funding. For instance, have you refinanced lately? Several lending companies still require that you take your real property out of the trust. Escrow assures you that it will generate documents to place the property back into the trust but then, through inadvertence, it may not happen. The consequence is that the property will go through probate, or at best a special hearing will be required. In either case, it defeats the purpose of having a trust.
Assets should be: one, titled in the name of the trustee of the trust, and so noted with the financial institution or with the county recorder’s office, and two, be listed in a schedule attached to the trust. This double-entry provides corroborating evidence that the asset is indeed in the trust, and minimizes challenges. The total identified assets constitute your trust estate.
Federal Estate
“Federal Estate tax” is an excise tax for your right to pass your own money on to someone else. While in some countries in the world this privilege does not exist, the tax is hefty. It is as high as 40% of the amount over the federal exclusion amount (in 2022 that is $12,060,000: see our updated Federal Estate Tax Table). This “Estate” has nothing to do with the other two above.
Now, there is good news and bad news. The good news is if you have real property heavily encumbered, only the equity is included in this “estate” — not your fair market value as it was for “probate estate”. The bad news: all those assets that passed by contract or operation of law or form of title, that were not counted in your “probate estate”, are part of this estate!
Admittedly, since the exclusion amount is currently so high, this is not a real issue for most of us. Should the threshold revert to prior times, many families with substantial life insurance may be over the mark and subject to Estate Tax and not realize it!
Conclusion
So, as you can see an “estate” means different things to different people. What are your Estates’ worth? Contact The Law Offices of Dominic E. Rainone, PLC to help you protect what you’ve earned.