One of the crucial responsibilities of a personal representative is asset characterization. This is the process of determining which assets owned by the decedent are properly probate assets, and which therefore need to be included in the formal Inventory and Appraisal report.
One of the more efficient ways of doing this is by retaining the services of a probate attorney. Doing so can be considered a calculated risk mitigation step, since misidentifying assets can delay administration, cause disputes, or even expose the estate to liability.
The personal representative’s failure to properly classify assets may even be considered a failure to adhere to the required standard of care of ordinary care and diligence, which could expose the personal representative to liability.
Below we take a look at some core principles to keep in mind while undertaking asset characterization.
A Core Question: Is there an alternative to probate in place?
One of the quickest ways to filter out which are probate and which are non-probate assets is to look into whether or not court intervention is required to transfer ownership. If there are means and methods in place for the ownership to transfer to designated beneficiaries or successors without need of a court order, it is a safe bet that it is a non-probate asset.
If no such beneficiary designation is in place, then the asset is most likely a probate asset and must be included in the Inventory and Appraisal list.
Who is on the Title?
Assuming that the asset is owned without any beneficiary designations that allow for Pay on Death (POD) or Transfer on Death (TOD) transfers, the next step to asset characterization is to check the asset’s title.
Whose name is on the title? Or more accurately, how is the title held?
Sole Ownership
If it is only the decedent’s name on the title, then the asset is likely a probate asset. This may include financial accounts without any beneficiary designations. As a general rule, if the only owner on title is the decedent, whether it be a vehicle, real property, or a financial account, the property passes through probate.
Joint Tenancy
Properties owned under a joint tenancy generally fall under the list of properties that do not go through probate. Joint tenancy has a right of survivorship wherein ownership automatically transfers to the surviving joint tenant if the other tenant should pass away.
Trust Assets
Similarly, trust assets do not go through probate. Trust assets belong to the trust, not to trust principal. And since a trust survives the decedent, any distribution of trust assets are handled according to the terms of the trust, outside of probate.
It must be noted that title ownership must always be analyzed within a greater context of ownership – there are exceptions and well-recognized instances where title ownership is not controlling of the asset characterization.
For instance, a joint tenancy that was created without authorization by the joint tenant will not be a recognized out-of-court transfer. (See Pool-O’Connor v. Guadarrama (2023)) And sole ownership properties that are actually community property will still be considered part of the probate assets. In both cases, the properties will be pulled back into probate and any transfers made outside of court will be considered void.
These kinds of nuances are the reason why it is crucial that the personal representative be assisted by a probate attorney.
Financial Accounts and Beneficiary Designations
Many financial assets such as financial accounts, life insurance policies, IRAs, and 401ks make room for beneficiary designations. In other words, the account owner is asked to list who will be the beneficiaries of the account in case of their death. If at the time of death of the decedent, the beneficiary is alive, the transfer takes place according to the terms of the beneficiary designation – outside of court. These are typically referred to as Pay on Death (POD) or Transfer on Death (TOD) properties.
The exception here is that if the beneficiary predeceased the account owner, in which case the beneficiary designation failed, unless contingent beneficiaries have also been named, the asset will be pulled back into probate and included in estate assets.
Out-of-State Real Properties and Ancillary Administration
These rules as laid out are based on the laws governing California probate. But real property located outside of California are subject to the laws prevalent in the jurisdiction in which they are located.
If the real property is located in another state, then the laws of that state apply. The same holds true if the real property is located in another country.
Such properties may be governed by laws that require local probate proceedings in order to facilitate transfer to the decedent’s successors. This means that while these properties may pass outside of California probate, they may be subject to probate proceedings where they are located. These are, under California, rules, referred to as ancillary probate proceedings.
Bottom line is, they are still probate assets, but they must be treated under separate probate laws and rules.
Community vs. Separate Properties
The rules of marital property in California must also be reviewed during the asset characterization process.
Since California is a community property state, the general rule is that any property acquired by either spouse during the marriage is considered community property, where each spouse owns a one-half interest.
As with anything else, there are also exceptions to this general rule. These exceptions must be verified carefully, however, and may include a review of any agreements between the spouses, or the tracing of the funds used to purchase the property.
In any case, California Probate Code §13502 does also make allowance for a surviving spouse electing to have their share of the community property be administered as part of the probate estate, either for strategic or tax reasons.
The Small Estate
Finally, estates that do not exceed the threshold for what are legally considered a “small estate” in California may not need to go through probate at all. Transfers of small estate may be facilitated by a small estate affidavit, without need of a court order.
This must be carefully reviewed, however. The use of a small estate affidavit requires that no formal probate has been initiated, and that 40 days have passed since the time of death.
Additionally, the value of the estate must be examined carefully. Has an appraisal been made? What date was the appraisal made? This is important because what is controlling is the value of property at the time of the decedent’s death. If the gross value of the estate is even one dollar over the small estate threshold, then the estate is no longer eligible for affidavit transfer.
Conclusion
Asset characterization for probate proceedings is important and fraught with potential risk for the personal representative. Mischaracterizing any property, or the incorrect application of any of the general rules and the exceptions noted above, could change the value of the estate in a significant way. Creditors and beneficiaries are all interested parties in a reliable assessment of the estate value, which starts with determining what properties are part of the probate estate.
The rules laid down in this article are general information only and is not intended as legal advice. You should consult with a qualified probate attorney to discuss any specific asset characterization issues you may have.