Valuation of Assets at Death

When someone dies, it is necessary to value all the decedent’s assets.  This valuation is used to determine if a federal estate tax return is due, and the amount of estate tax, if any, which is payable.  The valuation is also used to determine the new income tax basis for assets owned by the decedent.  This valuation should be used whenever some dies and leaves assets, whether there is a federal estate tax return filed or not, and whether the decedent had assets in joint tenancy, subject to a living trust or covered by his or her will.

The valuation of assets at the death of an individual is determined by provisions of the Internal Revenue Code and regulations.  In some areas, it is very precise, while in other areas it is less precise.  The valuation procedure is the same whether the decedent died with sufficient assets to require the filing of a federal estate tax return, or the decedent had insufficient assets to require the filing of an estate tax return.

General rule for valuation
If the decedent was a United States citizen or permanent resident of the United States, he or she is taxed on all the assets owned anywhere in the world.  The value of the assets is the “fair market value” as of the date of death.  This is the price at which an asset would change hands between a willing buyer and willing seller, neither being under compulsion to buy or sell.

Valuation date
The valuation date is the date of death.  The federal government allows an alternate valuation date to be used for estate tax purposes, which is six months from the date of death.  All assets can be valued at either of those dates, but it is not possible to value some assets at the date of death and some assets later.  If the alternate valuation date is used, the value on both the date of death and the alternate date must be obtained and reported.

If the alternate valuation date is used, any assets that have been distributed or sold prior to the six-month period are valued, not at the end of the six-month period, but at the date of distribution or sale.  Any assets which change only due to a time factor, have the same value on both dates.  A bank account would be valued at the same value on both dates, since there is no change in value of the account, only additional interest from the date of death to the alternate date.

The alternate valuation date can only be used if it lowers the value of the estate for estate tax purposes, and lowers the amount of estate tax due.  If there is no estate tax due as of the date of death because the decedent’s total assets were worth less than the estate tax exemption, or if there is a surviving spouse and the estate is exempt from estate tax, then only the date of death value for all assets can be used.

Assets includable
All assets owned at death are subject to taxation.  This includes life insurance, securities, real estate, pension and profit sharing funds, IRA accounts, automobiles, furniture, income tax refunds for the year of death, and all other assets.  Even assets which are exempt from federal income tax, such as state bonds, are taxable for estate tax purposes.

If the decedent was married at the time of death, only the decedent’s half of any community property is includable along with all the decedent’s separate property.  Even though assets may avoid probate, such as assets in joint tenancy registration or subject to a beneficiary designation, they are taxable for estate tax purposes.

If the decedent owned a partial interest in an asset, such as a 25% interest in real property, then only the decedent’s partial interest is valued.

VALUATION OF SPECIFIC TYPES OF ASSETS

Real property
Real property is valued by obtaining a written appraisal for the property.  If the property is a single-family dwelling, a written appraisal can be obtained from a local real estate broker or agent.  This appraisal should be on the agent or broker’s letterhead, describing the property, the value, and how this value was determined.

For unimproved land or lots with a value of approximately $250,000 or less a written appraisal by a real estate broker or agent, as listed above, can be used.

For commercial property, such as an apartment complex, office building, farm, or similar types of property, an appraisal from a reputable appraiser needs to be obtained, and is more detailed than a simple “letter” report from an agent or broker.  It may run from a few pages to 10-20 pages.

Any costs of sale such as future brokerage commissions and other costs are not considered in valuing real property.

If a farm or ranch is involved, it is also necessary to value separately the farm equipment, livestock, and growing or harvested crops.

Stocks, bonds, and other securities
Stocks and bonds which are traded on a major stock or bond exchange or over the counter are valued by obtaining the average value between the high and the low for the security as of the date of death.  If a stock was selling between $18.50 and $19.50 per share on the date of death, the average, or $19.00 per share would be the value used. The closing price is not used.

If the decedent died on a weekend or holiday when the market was closed, the high and low price for the last trading date prior to the date of death and the next trading date after the date of death are then “re-averaged.”

For mutual funds, the value is the “bid” or public redemption price of that fund on the date of death.  If the decedent died on a weekend or holiday the bid or public redemption value of that fund is obtained for the last business day prior to the date of death.

With stocks which are trading “ex-dividend”  the amount of this dividend must also be reported, even though this amount is paid in the future.  For any bonds, accrued interest on the bond from the date of the last interest payment to the date of death must be reported.

In valuing bonds if there is no high and low for the date of death, the bond is valued by averaging the closing price on the date of death and the closing price on the last trading date prior to the date of death.

United States Treasury notes and bonds are valued the same as other bonds.

United States Treasury bills are valued at their redemption value, without interest, since interest is included in the price.

United States Savings Bonds, Series E, EE, and HH are valued at their redemption value for the month of death.  The federal government publishes tables each month showing the redemption value of these bonds depending upon their face amount and month and year of issue.  The value as shown on these tables is the same for the entire month.  Series G, K, and H savings bonds are valued at their face value at date of death, with no value for interest.

Cash
All cash must be listed.  If foreign currency is involved, it is valued at the current commercial or retail exchange rate on the date of death, or if the death is a holiday or weekend, it is obtained by averaging the exchange rate for the last business day prior to death and the first business day after death.

Any coins or bills which have a value at greater than their face value, such as silver certificates, are valued at their numismatic value.

Bank and savings and loan accounts
Accounts at banks, credit unions, and savings and loan associations are valued by taking the exact value in the account as of the date of death.  Any checks written prior to the date of death but which have not been deducted from the account as of the date of death should be reported separately, so that only the “net” value is listed.

Interest from the date of last payment until the date of death also must be computed and reported separately.

Mortgages and notes
If there were any loans outstanding at the date of death, either secured or unsecured, these are normally listed with the value as of the date of death and accrued interest from the date of last payment until the date of death.

A note may be reported at less than the balance or as uncollectable if satisfactory evidence is submitted to justify the lower value.

Partnerships, corporations, LLCs and business interests
Partnerships (limited and general), shares in a closely held corporation, interest in a limited liability company (LLC) and other business interests must be valued by determining the fair market value of the entity, and then valuing the decedent’s share or interest.  Frequently this is discounted.  Normally the accountant who handles the business tax returns would be the best person to determine the value.

Some partnership units for very large partnerships are traded on a secondary market and can be valued using the value that the units sell for on the date of death.

Vehicles, boats and airplanes
All vehicles, whether an automobile, RV, motorcycle, mobile home, and all boats and airplanes are valued separately by determining the sales value of the item at the time of death.  This can be done by checking various internet publications for automobiles and other items.  What a dealer would pay is not considered a proper valuation, but instead you would use what a buyer would pay to purchase the item.

Household furniture and furnishings.
Although the instructions from the Internal Revenue Service require an itemized appraisal of furniture and furnishings, most accountants disregard this and report the furniture and furnishings in a single entry, with a value of approximately $2,000-5,000.

The major exceptions are if the decedent’s will or living trust listed specific items, such as a diamond ring or piano, or if the decedent did have objects of significant value, such as a painting worth $10,000.  The federal estate tax return asks if there are any items of artistic or intrinsic value with any item valued at more than $3,000, or any collection of similar items valued at more than $10,000.

Life insurance
The proceeds received from any life insurance policy insuring the decedent’s life must be listed, even if the life insurance was owned by someone other than the decedent and is not taxable.  If a federal estate tax return is filed, it is also necessary to obtain a special IRS form (form 712) from the insurance policy for each policy.

If the decedent owned a life insurance policy on some else’s life, this policy must be listed and the cash value of the property as of the date of death must be reported.

Pension, profit-sharing, IRA, 401k, and other retirement accounts
All plan benefits under a retirement plan which the decedent had at death and which are paid after death to anyone are valued, using the rules set forth in IRS regulations.  If an IRA account was invested in stocks and bonds, these securities would be individually valued, using the rules for stocks and bonds.

Other assets
Any other assets are valued at death by attempting to determine their “fair market value.”  This would include book royalties, mineral interests, income tax refunds for the year of death, leaseholds, judgments, prepaid rents, taxes, annuities which continue with payments after death; and any other asset.

FILING OF FEDERAL ESTATE TAX RETURN

If the values for all the decedent’s assets as listed above for the decedent’s half of the community property and all the decedent’s separate property exceeds a certain amount, depending upon the year of death, a federal estate tax must be filed within nine months of the date of death (or an additional six-month period if there is an extension is obtained to file the return).  This is true even though there may be no tax due because of amounts passing to the surviving spouse, amounts passing to charities, or because of debts and expenses.  The amount of exemption before an estate tax return must be filed, depending upon the year of death, is:
2015    $5,430,000
2016    $5,450,000
2017    $5,490,000

If a federal estate tax return is filed, the Internal Revenue Service has up to three years to audit the return.  The service frequently checks values for traded securities and if these are incorrect they advise the person who filed the return and, if additional taxes are due, they bill for the taxes plus interest and possible penalties.

INCOME TAX BASIS OF ASSETS

If an estate tax return is filed, the new income tax basis of the assets for whoever inherits is the value shown on the estate tax return.  If no estate tax return is required, the value is the date of death value for each asset owned by the decedent, using the rules set forth above.

When a married person dies, and has assets in the decedent’s and spouse’s name as community property, or if the assets are held in a living trust as community property, then both the decedent’s half of each asset and the surviving spouse’s half both gets a new income tax basis at the date of death.  John Doe bought 100 shares of XYZ stock for $2,000.  He dies years later with the stock valued at $10,000.  The stock was held in a living trust as community property.  Both his 50 shares and his wife’s 50 shares would each get a new valuation, and the stock would now have an income tax basis of $10,000, with the $8,000 potential capital gain being canceled.  If the stock was all the decedent’s separate property, the same would be true.

If the decedent held the stock in joint tenancy with his wife, only the decedent’s half of the joint tenancy gets a new value.  In the above example, if the stock were in joint tenancy, then the decedent’s one-half, of 50 shares would get a new value of $5,000, while the wife’s one-half would stay at the original cost of $1,000.

If the decedent is not married at the time of death than all the assets listed on the estate tax return or owned at the date of death if there is no estate tax return get a new value at the date of death, even if the asset is in joint tenancy.

CONCLUSION

The valuation of assets at the date of death can be complicated and confusing.  It is important that the surviving spouse, children, executor, or trustee, whoever is handling matters, gets competent advice from an accountant or attorney to be sure that the values used are correct and those values will be used for trusts, estates and income tax purposes.

 

 

Probate in California

          Most people are aware of “probate” but do not know what it means. Especially in view of what is written in the popular media, most people want to avoid the hassle, time, and costs of this process.

Purpose of Probate

Probate is not designed to be an employment bill for attorneys. The probate process can be avoided, but most people do not take the time or effort to understand what this process is and how it can be avoided.

Probate is a legal process whereby a court validates the deceased person’s will or determines that he or she died without a will. The court also appoints someone to handle the decedent’s assets and pay the bills owed at death. That someone is referred to as an executor, administrator, or administrator with the will annexed, depending on the circumstances.

An additional purpose of probate is to see if anyone was owed money at the time of death so that creditor can come forward and make a claim to receive payment. There is a fixed period of time for creditors to come forward and demand payment.

Along with the payment of debts, the probate process is designed to see that taxes are paid. Income taxes for the personal income tax return up to the date of death must be paid. Income collected during probate requires the filing of a separate estate income tax return and the payment of tax. If the decedent owned over $5,250,000 of assets at the date of death, depending on the year of death, a federal estate tax return is required and the tax due must be paid within nine months of the date of death.

Lastly, after all assets of the decedent are collected, assets are sold and taxes and debts are paid, then the executor or administrator must distribute the remaining assets in accordance with the decedent’s will or the rules of intestate succession if the decedent died without a will.

 Assets Subject to Probate Process

While not all assets that the decedent owned are subject to probate, the following assets are subject to the probate process:

  1. Assets in the deceased person’s name alone.
  2. An asset in the decedent’s name with his or her spouse, which is registered as community property, as to one-half of each community property asset.
  3. The deceased person’s portion or share of an asset where the asset is registered as tenants in common with other people.
  4. Assets which are owned but are not registered, such as furniture, jewelry, etc.

California law provides that a probate is not necessary if the total value at the time of death of the assets which are subject to probate does not exceed the sum of $100,000.  There is a simplified procedure for the transfer of these assets. The $100,000 figure does not include vehicles and certain other assets.

Assets not subject to Probate

As mentioned, not everything is subject to probate. Even though there may be a probate for a portion of assets owned, the following assets are not subject to the probate process:

  1. Assets titled in joint tenancy with another person or persons.
  2. Assets held in a living trust.
  3. Assets such as life insurance and IRA benefits, where a beneficiary is named.
  4. Assets in a bank or savings and loan account in the deceased person’s name as “trustee” for someone else.
  5. Assets which can be registered in a person’s name and which are “payable on death” to someone.
  6. Assets passing to the surviving spouse. If the deceased person owned assets in his or her name alone but these assets are left by will or pass by intestate succession to the surviving spouse, no probate is necessary.
  7. Assets held by husband and wife and titled as “Community Property with Right of Survivorship.”

California has a simplified legal process referred to as a “spousal confirmation proceeding.” Here, a petition is filed with the court, notice is given to certain parties, and if no one objects, the court approves the assets as going to the spouse. This procedure can only be used for husband and wife.

John Doe has $200,000 of separate property stock in his name alone. He has a will which leaves everything to his wife. His wife can go through this spousal confirmation proceeding. The advantage is there is no fixed fee as there is for probate, and the process takes approximately 30-60 days instead of 9-12 months.

STEPS INVOLVED IN THE PROBATE PROCESS

When someone dies, the first question is whether there will be a probate proceeding. If all of the assets are in a living trust or joint tenancy, then the answer will be no. If the deceased person has more than $150,000 of assets in his or her name alone and there is no surviving spouse or the assets were not left to the spouse, the answer will be yes.

If it is necessary to have a probate, the second question is who will act? If the decedent left a will, he or she named someone in the will as executor. That person or persons does not have to be a California or United States citizen or resident. A friend may serve, his or her  three children may serve jointly, or a California bank or trust company may serve. No one has to serve if named. Will the person or persons agree to serve?

If there is no will then the nearest relative or relatives have the first right to serve as administrator or to nominate someone if they do not wish to serve. If there is no will, the person appointed by the court is called an administrator.

Occasionally, someone will die with a will, but the will does not name an executor or the person named is deceased or will not serve. Or possibly a bank is named and the bank declines because the estate is not large enough for the bank. The court then appoints the nearest relative who inherits under the will. That person is referred to as an administrator with the will annexed.

All of the above do the same duty once they get appointed even though their title varies depending upon the circumstances.

Appointment by Court

To start the probate process it is necessary to file a petition with the superior court in the county where the deceased person lived at the time of death. This petition is set for hearing approximately 45-60 days after it is filed with the court.

If there is an emergency and it is necessary for someone to act within the 30 day period, it is possible to get someone appointed within 24 hours as a “special administrator.” This person handles estate assets until the executor or administrator gets appointed. If the decedent was the only signer on a business bank account and salary and other bills have to be paid immediately, a special administrator can be appointed.

After the petition is filed, a notice of the court hearing must be published three times in a local newspaper. In addition, a notice of the court hearing must be mailed at least 15 days prior to the hearing to everyone named in the will and all of the deceased person’s heirs at law (those people who would inherit if he or she died without a will).

If the will had special wording at the end of it where the witnesses sign, then it may be “self-proving” and no additional statements are necessary. If the will is not self-proving then a statement must be obtained from one of the witnesses to the will.

If a witness cannot be located, then there are several alternative ways of proving the will. If the will is handwritten anyone who is familiar with the decedent’s handwriting can sign a statement proving the will.

If the will does not waive a surety bond, then the executor or administrator must post a surety bond. The surety bond is nothing more than an insurance policy which insures the estate if the executor or administrator does something improper or steals from the estate. Unfortunately, the premium of approximately $200-800 is paid out of the estate assets.

At the court hearing if everything has been done and there are no objections, the court will admit the will to probate and appoint the executor or administrator.

After the appointment the executor or administrator must file a special form with the court titled “letters testamentary” or “letters of administration.” This is signed by the person and he or she agrees to act as executor or administrator. Later, when taking legal action or transferring assets, other parties will want a certified copy of these “letters” showing that the person has the legal authority to act.

Collecting Assets

After the appointment the executor or administrator must take possession of all of the decedent’s assets subject to the probate process. Assets in joint tenancy, assets in a living trust or assets subject to a beneficiary designation are not part of the probate and are not collected.

The executor or administrator needs to change title to the assets and to put these assets in his or her name as executor or administrator. Mutual funds, stocks and bonds, brokerage accounts, bank accounts, real property, vehicles and other assets should be changed over.

After collecting all of the assets, it is necessary to prepare an inventory listing these assets. At the time that the executor or administrator was appointed the court also appointed a “California Probate Referee.” This individual has the responsibility of valuing all of the non-cash items with the fair market value as of the date of death. The referee receives a fee of $1 per $1000 for the value of the assets appraised. The value is the gross value excluding any loans or liens on the assets. If the home is valued at $300,000, even though there is an $180,000 mortgage on this home, the referee values it at $300,000 and receives a $300 fee for this.

There are legal procedures for contesting the referee’s value if someone does not believe it to be accurate.

The appraisal of all of the assets is supposed to be filed with the court within four months of the executor’s or administrator’s appointment.

Payment of Bills and Debts

As soon as the executor or administrator is appointed by the court and obtains money, bills can be paid. Funeral, utility, credit card and other bills can be paid without any special legal formality.

Anyone can be required to submit a creditor’s claim in the estate. This is a special court form which must be completed by the creditor and approved by the executor or administrator. If the executor or administrator wants this form submitted by a creditor, then a notice must be sent to the creditor.

Claims normally must be submitted within four months of the executor’s or administrator’s appointment. There is an exception if the creditor was not aware of the death. If that occurs, the creditor can petition the court after the four-month period for submitting a claim. The petition can not be filed later than one year after the executor’s or administrator’s appointment.

If a creditor’s claim is rejected by the executor or administrator, the creditor must file a lawsuit within three months of the rejection or lose all right to later sue. Before a lawsuit can be filed, the creditor must file a claim.

If John Doe is in an automobile accident and dies and other parties wish to sue his estate, they must file a creditor’s claim within the required period before they can file a lawsuit.

Most estates do not involve any creditor’s claims. The executor or administrator pays the outstanding bills and no one objects.

Sale of Estate Assets

It may be necessary or practical to sell some or all of the estate assets. Assets may have to be sold to pay taxes, fees and debts. Or the home may be vacant and the children do not wish to inherit it, so it is sold during probate.

There are two methods of selling assets in a probate proceeding, which the executor or administrator may choose.

First, court approval may be obtained before any asset is sold. If the stocks or bonds are sold, a court order is necessary before selling them. If real estate is sold, a court hearing must be held and anyone may offer a higher price for the property in court and take it away from the original buyer.

Second, the executor or administrator may sell assets under a provision of California law referred to as the “Independent Administration of Estates Act.” Under this act the executor or administrator may sell any asset. The only requirement is to give written notice to any beneficiary who is affected by the sale at least 15 days before the proposed date of sale. If no one objects, then the sale may proceed. If someone objects, then the court must be petitioned for approval the same as alternative number one, above.

After appointment, the executor or administrator usually prepares a budget with an estimate of the federal estate tax, fees for the executor and attorney, administrative costs, cash bequests under the will, and debts or claims. If there is insufficient cash available, then a decision must be made as to what assets to sell. If there is sufficient cash available, then a decision must be made as to whether any assets such as the home should be sold.

Once the decision is made to sell assets, the executor or administrator should proceed with the sale. It makes little sense to allow the home to remain vacant for nine months and then put it on the market for sale. If the home is going to be sold, there seems little reason why it should not be marketed within 30 days of the appointment.

PAYMENT OF TAXES

The executor or administrator is liable to see all of the taxes due the federal government and the State of California are paid. While he is not normally personally liable, his liability does extend to the assets which are in probate. If the executor or administrator distributes assets and the Internal Revenue Service or California Franchise Tax Board assesses a deficiency, he is liable to the value of the assets distributed.

One immediate concern is who will handle all of the tax work involved? It can be the executor or administrator if the person is skilled enough to do so. Or, it may be the attorney. More likely it will be the tax preparer, enrolled agent or certified public accountant who handled the decedent’s tax matters prior to death. Whoever it is must be skilled enough to prepare and file all of the required tax returns.

Federal Estate Tax

If a person dies with over $5,250,000 (2013), in assets, an estate tax return must be filed within nine months of the decedent’s death. An extension to file this return may be obtained for up to an additional six months.

Any amounts left to qualified charities and any amounts left to the decedent’s spouse (if a United States citizen) are exempt. All debts that the decedent owed at the time of death such as funeral costs, legal fees, debts, etc. are also deducted. If the net estate is over $5,450,000, after deducting the debts, a tax of 40% of the amount over  $5,450,000 is payable. If the return is not filed within the required time limit or if the tax due is not paid there may be substantial penalties and interest. Because the value of the assets is the value as of the date of death, the person who is preparing the tax needs to immediately start gathering information as soon as possible after the decedent’s death.

Prior to Death Income Tax Returns

Even when someone dies, an income tax return has to be filed for the year of death. Mary Doe dies on July 21st. An income tax return will be required from the first of the year until the date of death-January 1st-July 21st. The return is due by April 15th of the following year. Only the income received and any deductions paid through the date of death will be reported on the return. Income such as dividends and interest received after the date of death will not be reported on the return but will be picked up on the estate income tax return or by the surviving joint tenant if the asset was in joint tenancy.

Any medical deductions on the decedent’s part paid within one year of the date of death may be deducted on the final return. All other deductions must have been paid before death to be allowable.

Estimated income taxes paid for the year of death should be reviewed. Depending upon the date of death, it may not be necessary to continue to make estimated payments after death.

The decedent’s income tax returns for the four years prior to death should be retained and the return for the year prior to death should be carefully reviewed to be sure all items of income and deductions are picked up.

If the decedent died after January 1st but before April 15th or even later, a return may still be due for the prior year. With extensions, it is possible to file the income tax return as late as October 15th for the prior year. If the return has not yet been filed, an extension can be requested and will usually be granted.

Fiduciary Income Tax Returns

Income which comes in after the date of death is not reported on the decedent’s personal income tax return. If the interest, dividends or other income are paid to the estate, they must be reported on the fiduciary or estate income tax return. A separate tax identification number is obtained for the estate and used in lieu of the decedent’s social security number.

A separate income tax return, called a fiduciary tax return, is filed annually for the estate. This form lists the taxable income such as dividends, interest, capital gains and net rents. The fiduciary return also takes off the allowable deductions such as mortgage interest, legal and executor’s fees, taxes, and a few other deductions.

The tax return does not have to filed on a calendar year basis, as of December 31st. It can be filed on a fiscal year basis at the end of any calendar month. Once a fiscal year is picked, the return must be filed within 3-1/2 months of the end of the tax year.

At the end of the tax year if the estate has not been closed and distributed, the tax is then paid on the net income. That income is later distributed to the beneficiaries of the estate without additional tax. If the estate has been distributed during the tax year, the tax is not paid on the net income, but instead each beneficiary must list his or her proportionate share of the taxable income on his or her personal tax return.

Fiduciary tax returns are required until the estate is closed and distributed. If the estate is open for more than two tax years, estimated fiduciary taxes must be paid each year.

Other Taxes

Other taxes may also be due. Real estate taxes are due in California by December 10th and April 10th. Sales tax may be due if there is a business selling some product.

If the decedent made a gift of over $14,000 to someone during the year of death, a gift tax return may be due. If there is real property in another state or country, it may be necessary to file a separate income tax return for the income in that state or country.

Liability for Taxes

As previously mentioned, the executor is liable for taxes if assets are distributed and additional taxes are later discovered to be due. Because of this, the executor or administrator will frequently request to be allowed to hold back some estate funds for a period of time as a reserve if additional taxes are due. This reserve may be kept for two to three years and then distributed without additional court order to the estate beneficiaries.

The period of liability for taxes is normally three years for the federal government. This period is from the due date of the return or the filing date if it is later. The period of liability for the State of California is four years. The liability for a 1998 return filed on or before April 15, 1999, will expire on April 15, 2002 for the Internal Revenue Service and on April 15, 2003 for the California Franchise Tax Board. There are longer periods of liability if the taxes are underpaid by 25% or more. The period of liability never runs out if a tax return is not filed or if there is fraud involved.

CONCLUDING THE ESTATE

After the estate assets have been inventoried, the period for filing creditor’s claims has expired and all claims paid or resolved, the necessary assets sold, and all required tax returns filed and taxes due paid, then the estate can be distributed.

To conclude the estate it is necessary to petition the court and to obtain a court order to make the distribution. The executor must either file an elaborate accounting listing all receipts and disbursements or obtain a waiver of the accounting from all of the estate beneficiaries.

After the accounting is prepared or waived, a petition is drafted which is a summary of the estate and the actions taken. This petition lists the assets currently on hand and the proposed distribution of these assets. The fee that the executor or administrator and the attorney receive is computed and shown.

If everything is in order and there are no objections, the court will issue an order concluding the estate, ordering the fees paid, and the assets distributed.

Once the court order is obtained, checks may be written and assets re-registered in the names of the estate beneficiaries. After the assets are distributed a receipt for these assets is obtained from each estate beneficiary and filed with the court.

As previously stated, if the estate is relatively simple and no federal estate tax is due, it can be concluded in 6-9 months. If there is an estate tax due, the period will likely increase to 12-15 months. The estate should not be in probate for more than 18 months unless there is litigation or significant problems that prevent distribution.

© Milton Berry Scott, 1998-2016

Revised 1-2-2016

 

Administration of a Joint Husband and Wife California Living Trust upon the Death of the Surviving Spouse

California law requires that the trustee or trustees of a living trust take certain legal action when the trust terminates, or upon the death of the surviving spouse.

A husband and wife establish a revocable living trust and transfer assets into their names as trustees of the trust.  Then one of the spouses dies and the trust assets are divided into either two or three subtrusts.  Trust A, which is also called the survivor’s trust, marital trust, or something else, is the revocable trust for the benefit of the surviving spouse and contains the surviving spouse’s assets

Trust B, also called the family trust, residual trust, or some other name, was previously established when the first spouse died and contained an amount which either was the maximum exempt from estate tax when the first spouse died, or the total assets the first spouse owned in the trust at the time of his or her death.  This became an irrevocable trust when the first spouse died and generally is for the benefit of the surviving spouse, with the surviving spouse as the sole trustee.

What action has to be taken with regard to these two trusts when the surviving spouse dies?

A number of things have to be done, depending upon the terms of the living trust.  The successor trustees who are designated in the trust document must take some actions which are legally required by the trust document, California law, and federal tax law.

The first concern is who the successor trustee is?  In the trust agreements or trust declarations there is normally a statement as to who the successor trustee is—who takes over the management of all of the trusts upon the death of the surviving spouse.  In many cases it is a child or children.  In some cases it is a bank or trust company.  If there are several trustees, then they must all act jointly in connection with the management of the trusts.  Whoever the trustee or trustees are have the legal responsibility to see that a number of actions are undertaken.  If these are not done or are done incorrectly then the trustee or trustees may be liable for additional taxes or may be liable to the trust beneficiaries for mistakes which are made, even if made in good faith.

 TRUST A
Trust A was the survivor’s revocable trust and in most cases the surviving spouse was the trustee until he or she died.

Re-registration of Assets
The successor trustee or trustees need to re-register the assets in the name of the successor trustee or trustees.  If John and Mary Doe establish a living trust, John Doe and Mary Doe both die, and Helen Doe Smith is the successor trustee, then the assets should be re-registered in the name of “Helen Doe Smith, Trustee of the Mary Doe and John Doe Living Trust dated August 17, 1999—Trust A.”  A certified copy of the death certificate and a certification of the trust need to be provided to each institution or party holding title to assets, such as stock brokers, mutual funds, banks, general partners of a limited partnership, and others.  Financial institutions may have the trustee or trustees complete additional paperwork.

No distributions should be made from the trust immediately; the trust assets should be retained until debts, taxes and other expenses are paid.

Tax Identification Number
Normally, the surviving spouse was using his or her social security number for the assets in Trust A.  If not previously obtained, a tax identification number for Trust A needs to be obtained from the IRS.  This is done by completing IRS form SS-4 and submitting it to the IRS Service Center or doing this online.  If mailed in, the IRS will mail the number to the trustee or trustees within approximately four weeks.  This number is used in place of a social security number for all of the trust assets in Trust A.  A trust income tax return will also have to be filed for the trust as of December 31st of each year until the trust ends and the assets are completely distributed.

The income from January 1st until the date of death is taxed to the surviving spouse.  The income from the date of death until December 31st will be taxed either to the parties who receive the trust assets or to the trust, depending on whether the income is distributed or accumulated in the trust.

Trust Certification
California law allows a “certification” with regard to the trust.  This certification is merely a typed statement which lists the current trustee or trustees, tax identification number, powers of the trustee or trustees, and other pertinent provisions of the trust and is signed by the successor trustee or trustees and notarized.  This certification, along with a certified copy of the death certificate of the deceased spouse, is submitted to each organization to transfer assets into the name of the successor trustee or trustees.

Change of Ownership Statement for Real Property
Whenever an owner of California real estate dies it is necessary to file a special statement entitled “Change of Ownership Statement—Death of Real Property Owner” with the county assessor of each county where real estate is owned.  This notifies the county assessor whether the property is subject to reassessment for real estate tax purposes or is exempt from reassessment.  A statement for each separate parcel of real estate which is in Trust A is to be filed within 145 days of the date of death.

Change in Title to Real Property
An “Affidavit-Death of Trustee” is a real estate form which is recorded for each parcel of real estate in the trust, along with a certified copy of the death certificate.  This changes title of the property or properties into the names of the new trustee or trustees.

Preliminary Change of Ownership Report
Whenever any change of ownership to real property occurs, it is necessary to file a real estate form called “A preliminary change of ownership report.”  This document notifies the county assessor whether real estate is subject to reassessment or not.  This is normally filed whenever there is a document which is recorded which changes title to the real property, such as an “Affidavit-Death of Trustee.”

Real property passing to children of the deceased, sons-in-law, daughters-in-law, and, in some cases, to children of a deceased child is exempt from reassessment as to the decedent’s residence and up to $1,000,000 of other real estate, based on the real estate’s assessed valuation as of the date of death.  Transfers to other relatives who inherit or someone not related to the deceased trigger a reassessment.  The property is reassessed as of the date of death at its fair market value, and the real estate taxes are increased accordingly to 1 to 1.2% of this value.  A supplemental real estate tax bill is later mailed, if required, for the year of death.

Filing Original Will
California law requires that within 30 days of the date of death the original will of the deceased along with any codicils be filed with the county clerk in the county where the deceased resided at the time of death.  This includes all original wills and codicils, even if they have been revoked.  These documents are “filed” with the county clerk. The court filing fee is $50.00.  In addition, a copy of the will must be mailed to the person named in the will as executor, even if probate may not later be undertaken.

Notifying all Trust Beneficiaries and Heirs
Since 1998 it is necessary within 60 days of the date of death to notify in writing all trust beneficiaries and the deceased’s heirs at law of the living trust and to send them a special notice of the living trust and copies of portions of the trust.  Once the notice is mailed, then a party only has 120 days from the date of the mailing of the notice to contest the trust.  Each party must be advised of his or her right to contest the trust.  If the notice is not mailed, then a beneficiary may have up to four years or longer to contest the trust.  There are potential damages, including attorney’s fees and costs, if the trustee or trustees do not mail notice and comply with all of the legal requirements.

Notice to Creditors
There is a special provision in California law allowing a notice to creditors to be filed in a living trust similar to that used in a probate procedure.  This requires a filing with the county clerk and publication of a notice three times in a local newspaper.  The costs can run $700-1,000 in addition to attorney’s fees.  Special notice must also be mailed to any known creditors of the deceased.  Creditors then have maximum of four months to file a claim in the trust, with some exceptions.  If a claim is not filed and all procedures have been followed, the creditors lose their right to payment.

While this procedure is not legally required, if it is not done a creditor could have a period of up to three to four years to seek payment.  If the trustee does not use this procedure and a creditor later appears, the trustee or trustees may be personally liable because they failed to follow this procedure.

Valuation of Assets
It is necessary to value all assets in Trust A as well as all assets which the decedent owned which were not in the trust as of the date of death.

The value which is used is the fair market value as of the date of death.  Stocks and bonds must be valued by taking the average between the high and the low as of the date of death.  If the deceased died on a weekend or holiday, the average between the high and low for Friday and Monday must be re-averaged.  Mutual funds take the closing price on the date of death.  Other assets such as real property, partnerships, automobiles and certain other assets need a written or appraised value by a competent appraiser such as a real estate agent or broker for real property.  A valuation for all assets, in and out of the trust, should be obtained.  This includes life insurance, IRA accounts, 401k plans, etc.  Furniture and furnishings are not normally valued unless they have a high value.  Generally, a value of $2,000-10,000 is used for personal items.

Under federal and California income tax law all assets of the decedent, including all assets in Trust A get a “new” income tax value as of the date of death.  Most brokerage firms and mutual funds can provide the value of investments.  All potential capital gains are eliminated at death, and the assets are treated as if they were purchased for their value as of the date of death.

Federal Estate Tax Return
A federal estate tax return must be filed if the deceased’s assets exceed a gross value of a certain amount.  This value is based on all assets, whether in the living trust or not.  If there is a Trust C, then the assets in Trust C also need to be valued since these assets will also be subject to estate tax.

If this total, before deducting any expenses or costs, exceeds the following amount, a federal estate tax return must be filed within nine months of the date of death.  If necessary, an extension can be obtained for up to six months to file the return.

Year of Death                                     Exempt Amount
2015                                                      5,430,000
2016                                                      5,450,000

The tax rate on the excess, above the estate tax exemption, is 40%.

Probate
Normally, a living trust avoids probate.  However, occasionally, someone dies and has too many assets outside the living trust.  These assets, not in the trust, may have to go through probate.

California does not require a probate unless the assets outside the living trust exceed the value of $150,000 as of the date of death.  In addition, this figure does not include any assets in joint tenancy, any vehicles, or any assets where a beneficiary is specifically named such as life insurance or IRA accounts.  If a probate is not required, then the trustee or trustees of the living trust have to wait for 40 days from the date of death.  They can then sign a special certification form and transfer the assets into Trust A, or to whoever is legally entitled to the assets.

If the total amount of assets outside Trust A, and over and above the excluded assets listed above, is worth more than $150,000 as of the date of death, these assets will have to go through probate before they can be placed in Trust A.

DISTRIBUTING TRUST A
After the federal estate tax return is filed or, if there is no return, approximately nine months from the date of death, consideration is given to distributing the assets in Trust A.  Assets in Trust A can be sold or divided among various parties if the parties agree.  One beneficiary may wish to take California tax exempt bonds; another beneficiary may wish the real property, etc.  Normally, division is made based on the values as of the date of distribution, again provided the parties agree.  If there is no agreement and the assets in Trust A pass to the three children, then each child would get one-third of each asset.

Once a decision has been made as to the division of the trust assets, a detailed list should be prepared showing the allocation of assets to the various beneficiaries.  This list should itemize all of the assets with their value on the estate tax return or date of death value if no estate tax return is necessary and then show the allocation to the respective parties.  The list is then signed by the trustee or trustees and retained should any questions arise as to how the assets were divided.

If Trust A continues in whole or part as a trust, then the trustee or trustees need to re-register assets in the trustee’s names, keep records, invest funds subject to the provisions in the trust document and California law, and provide the trust beneficiary or beneficiaries with an annual accounting.

Re-registration of Assets in Beneficiaries Names
After a division has been decided and a list signed, then the assets need to be registered in the names of the various beneficiaries. Again, each transfer agent, bank, brokerage firms, etc., is contacted and a transfer of title undertaken.  New deeds are recorded with regard to each parcel of real estate.  After re-registration is completed, a receipt should be obtained from each beneficiary for the assets delivered and these receipts are retained by the trustees to show that the assets have been delivered.

Accounting
In addition, the trustee or trustees of any trust created after July 1, 1987, must file annual accountings with the trust beneficiaries, and also do an accounting upon a change of trustees and upon the termination of the trust.  Unless the accounting is waived by all of the trust beneficiaries, the accounting must show the assets on hand as of the date of death with their values, income received, disbursements, assets sold with the gain or loss being listed, and when distribution occurs, the accounting must show the assets on hand with both their date of death and current fair market values.

TRUST B
Trust B has normally been an irrevocable trust with the surviving spouse as the beneficiary of the trust and the sole trustee.  Upon the surviving spouse’s death, the designated trustee or trustees must take over the administration of the trust.

Tax Identification Number
A tax identification number was obtained for Trust B when it was created.  This number will continue to be used for the assets in Trust B, and a new tax identification number is not needed.

Trust Income Tax Returns
The income from January 1st until the date of death is taxed to the surviving spouse.  The income from the date of death until December 31st will be taxed either to the parties who receive the trust assets or to the trust, depending on how matters are handled.  Trust income tax returns, federal and California, must be filed until Trust B is terminated and assets are completely distributed.

Trust Certification
California law allows a “certification” with regard to the trust.  This certification is merely a typed statement which lists the current trustee or trustees, tax identification number, powers of the trustee or trustees, and other pertinent provisions of the trust and is signed by the successor trustee or trustees and notarized.  This certification, along with a certified copy of the death certificate of the deceased spouse, is submitted to each organization to transfer assets into the name of the successor trustee or trustees as trustees of Trust B.

Assets will be registered in the name of the new or successor trustee or trustees.  “Helen Doe Smith, Trustee of the John Doe and Mary Doe Living Trust dated August 17, 1999—Trust B.”

Change of Ownership Statement as to Real Property
If there is any California real estate owned in Trust B it is necessary to file a special statement entitled “Change of Ownership Statement—Death of Real Property Owner” with the county assessor of each county where real estate is owned.  This notifies the county assessor whether the property is subject to reassessment for real estate tax purposes or is exempt.  A statement for each separate parcel of real estate which is in Trust B is to be filed within 145 days of the date of death.

Change in Title to Real Property
An “Affidavit-Death of Trustee” is a real estate form which is recorded for each parcel of real estate in Trust B, along with a certified copy of the death certificate.  This changes title of the property or properties into the names of the new trustee or trustees.

Preliminary Change of Ownership Report
Whenever any change of ownership to real property occurs, it is also necessary to file a real estate form called “A preliminary change of ownership report.”  This document notifies the county assessor whether real estate is subject to reassessment or not.  This is normally filed whenever there is a document which is recorded which changes title to the real property such as an “Affidavit-Death of Trustee.”

Real property passing to children of the deceased, sons-in-law, daughters-in-law, or to children of a deceased child is all exempt from reassessment, subject to the exemptions listed above.  Transfers to other relatives who inherit or someone not related to the deceased trigger a reassessment.  The property is reassessed as of the date of death at its fair market value and the real estate taxes are increased accordingly to 1 to 1.2% of this value.  A supplemental real estate tax bill is later mailed, if required, for the year of death.

DISTRIBUTING TRUST B
Trust B is not normally subject to estate taxes.  The assets can be distributed approximately three to nine months after the death of the surviving spouse.  Assets in Trust B can be sold or divided among various parties if the parties agree.  One beneficiary may wish to take California tax exempt bonds; another beneficiary may wish the real property, etc.  Normally, division is made based on the values as of the date of distribution, again provided the parties agree.  If there is no agreement and the assets in Trust B pass to the three children, then each child would get one-third of each asset.

Once a decision has been made about the division of the trust assets, a detailed list should be prepared showing the allocation of assets to the various beneficiaries.  This list should itemize all of the assets with their value on the estate tax return or date of death value if no estate tax return is necessary and then show the allocation to the respective parties.  The list is then signed by the trustee or trustees and retained should any questions arise as to how the assets were divided.

If Trust B continues in whole or part as a trust, then the trustee or trustees need to re-register assets in the trustees’ names, keep records, invest funds subject to the provisions in the trust document and California law, and provide the trust beneficiary or beneficiaries with an annual accounting.

Re-registration of Assets in Beneficiaries Names
After a division has been decided and a list signed, then the assets need to be registered in the names of the various beneficiaries. Again, each transfer agent, bank, brokerage firms, etc., is contacted and a transfer of title undertaken.  New deeds are recorded for each parcel of real estate.  After re-registration is completed, a receipt should be obtained from each beneficiary as to the assets delivered and these receipts are retained by the trustees to show that the assets have been delivered.

Accounting
In addition, the trustee or trustees of any trust created after July 1, 1987, must file annual accountings with the trust beneficiaries, and also do an accounting upon a change of trustees and upon the termination of the trust.  Unless the accounting is waived by all of the trust beneficiaries, the accounting must show the assets on hand as of the date of death with their values, income received, disbursements, assets sold with the gain or loss being listed, and, when distribution occurs, the accounting must show the assets on hand with both their date of death and current fair market values.

SUMMARY
It is important to administer the various living trusts correctly upon the death of the surviving spouse.  There are many legal requirements for the trustee or trustees when the second spouse dies and the trust assets are distributed.  The failure to follow the law properly can result in possible litigation, the trustee being personally liable for damages, and the trust being attacked by the Internal Revenue Service.

It is very important for the trustee or trustees to have an attorney and accountant or tax preparer who are familiar with the law and the handling and administration of trusts in California as advisors.

© Milton Berry Scott, 1998-2016

Revised January 3, 2016