Title is proof of ownership.
That is what many of us have come to understand and accept.
If your name is on the title, you are the owner. If the decedent was on the title, then unless the property is a non-probate asset (such as a transfer-on-death (TOD), pay-on-death (POD), or trust property), then the assumption is that the decedent’s interest in the property is part of the probate estate.
But in California, the crucial legal question is not, “Who is on the title?” It is, “What is the character of the property?”
Characterization often overrides title ownership. A good understanding of asset characterization is therefore important for all relevant parties: the personal representative, heirs and successors, and even co-owners on a title.
Understanding what characterization is and how it works can mean the difference between efficient probate administration and costly legal battles.
The Community Property Presumption
One legal property characterization is that set forth in Family Code §760. That is, all property acquired by a person during their marriage is presumed to be community property.
So regardless of which spouse is on the title, if one spouse, for instance, bought real property during the marriage in California, the decedent’s one-half interest in that property will be part of the estate of the deceased spouse.
Even if both parties had agreed that the property would be considered separate property of the spouse on the title, the property may still be considered community property by the courts.
Some may consider that putting one name on the title would be a way for them to avoid probate, but this is widely considered a trap. As stated earlier, the controlling question would not be who is on the title, but the character of the property. If it is considered community property, the decedent’s interest would be included as part of the estate assets, which directly affect creditor rights and distribution.
When Community Property overrides a Joint Tenancy Title
One of the well-known exceptions to assets going into probate are properties held under joint tenancy. Joint tenancy creates a survivorship right in favor of the surviving joint tenant, and title passes automatically upon death, which means it is one effective way to bypass probate.
But as with all things in the law, this is not always true. In the 2020 case of In re Brace, the court found that if it is established that the property held under joint tenancy was actually acquired using community funds, then the decedent’s interest in the property may be subject to probate despite the joint tenancy designation. That means that the property will still go through probate. This presumes, however, that a probate dispute attorney is able to show that the spouses did not truly intend to transmute their community interest into a true joint tenancy, with separate interests.
Spousal Election in favor of probate
Sometimes, spouses may elect intentionally to have their assets brought into probate.
This is the spousal election under Probate Code §13502, in which the surviving spouse elects by written instrument to have their share of the community property included in the probate of the estate of the deceased spouse.
This may seem counterintuitive – most would prefer not to have properties pass through probate, and certainly if the share of the surviving spouse passes to them automatically upon death, why would they elect for their share to go through probate?
The underlying reasons for this spousal election under Probate Code §13502 are essentially strategic, and may include the following:
- It provides a way to clear the title of real property and confirm the surviving spouse’s right to it, thereby preventing future title disputes;
- It allows the probate process to handle creditors’ claims in an orderly fashion, since even non-probate community property may still be liable for debts; and
- It enables all community property included in probate to be valued by a probate referee, thereby creating a court-backed fair market value for tax “step-up purposes, thereby reducing future disputes or audits
Property Characterization to Protect the Creditors
The reason why property characterization matters more than title in California is because it avoids the scenario where property is transferred to avoid probate and therefore also the reach of creditors.
A decedent’s share of community property, for instance, should be available during probate and included in the inventory of estate assets to potentially pay off any approved creditors’ claims. Should the decedent wish to avoid this by transferring title to their spouse immediately before his death, that puts creditors at a disadvantage. And yet, if character rather than title is used as the basis for identifying probate assets, the decedent’s share in the community property are still probate assets, regardless of whose name is on the title.
This is why the role of the personal representative is crucial – not only in identifying and consolidating estate assets, but also in determining their character. The assistance of a probate attorney well versed in these nuances would be indispensable to the personal representative, and also helps to avoid surcharge. A personal representative that fails to properly characterize and marshal estate assets may be held personally liable (or surcharged) for neglecting their duties to creditors.
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If you are having difficulty in identifying and consolidating estate assets, you may need the help of a qualified probate attorney. Reach out to us today for a consultation and we can help guide you through the process.