A simple way to understand probate bonds is to compare it to an insurance policy, except that it insures the estate and the beneficiaries against losses caused by the personal representative’s wrongful conduct.
If you have recently been appointed as a personal representative, it might seem like am unnecessary expense given the context of the recent loss of your loved one. But probate bonds are a built in safeguard in California’s probate system to protect the estate and the heirs by ensuring the faithful performance of duties by the person responsible for managing the estate.
Why is a Bond Necessary?
A probate bond is compulsory or mandatory under California law. Under California Probate Code §8480, the person appointed as personal representative is required to give a bond approved by the court before letters of administration will be issued.
This means that before the court approves the authority of a person to act as a personal representative for an estate, that person must first put up a bond.
The purpose of the bond is to ensure against willful misconduct, neglect, or breach of trust by the personal representative. Should the estate suffer losses or depreciation because of actions taken or not taken by the personal representative, the personal representative may be deemed personally liable for the loss. This type of personal liability of the personal representative is called a surcharge. But what if the personal representative is unable to pay the surcharge? This is where the bond becomes useful.
Who Pays the Bond?
Since it insures against the actions of the personal representative, it might seem like the bond is something that the personal representative is required to pay as a guarantee of their conduct.
The probate bond is actually considered an administration expense for the estate, which means that the estate pays the premium for the bond. Much like in insurance, the insured (in this case, the estate) pays the insurance premium, as insurance against one specific type of risk – the actions of the personal representative.
Realistically, however, the personal representative often does pay the bond premium – at least initially. The court cannot issue the letters of administration unless the personal representative submits a court-approved bond, which means the personal representative does not yet have access to the estate accounts and funds. Once the letters are issued, the personal representative is entitled to reimburse themselves for this cost.
If there is a loss to the estate, the surety company issuing the bond will cover the loss – up to the amount of the bond. But this does not mean that there are no consequences to the personal representative. Once the surety company pays out on the bond, they are also entitled to go after the personal representative to recover the funds paid out on the bond.
Can the Bond be Waived?
Despite the general mandatory nature of a probate bond under California law, there are two instances when it may not be required:
- If the deceased specifically waives the bond in his will; or
- All the beneficiaries can sign a written waiver requesting that the bond be excused
Despite a valid waiver, however, the court still retains absolute discretion to require a suitable bond, depending on the circumstances. For instance, even if all the heirs collectively signed a waiver, the court may still require a bond if the personal representative is not located in California, as security for an out-of-state probate administrator.
How Much is the Bond?
The probate bond is an annual cost of the estate, should probate exceed one year. The court calculates the amount of the bond based on the total values of the following:
- The estimated value of all personal property of the estate; and
- The probable annual gross income from all estate property
The general rule is that the bond cannot exceed the sum of the two values. However, should the personal representative be granted “Full Authority” under the Independent Administration of Estates Act (IAEA) to sell real property without need of court confirmation, then the amount of the bond must also include the estimated value of the estate’s interest in that real property.
In short, the higher the risk, the higher the amount of the premium.
What if the value of the estate changes?
It may happen that new properties are added to the estate, thereby increasing the basis for the amount of the bond. If this happens, an application to increase the bond must be made immediately. Otherwise, once the court reviews the Inventory and Appraisal of the estate, and the values don’t match, the personal representative may be found to be personally liable.
The reverse is also true. If it is later found that the original value used as the basis for the bond amount is actually lower, then the bond can and should also be lowered. The personal representative can then petition the court to reduce the amount of the bond based on the revised value.
Can the Value of the Bond be Reduced?
With a high value estate, the amount of the bond can also be high, sometimes prohibitive. California does allow one way to reduce the cost of the bond. This is with the use of blocked accounts.
A blocked account, in this context, means that the personal representative deposits funds or cash from the estate into a financial institution under the express agreement that said funds can only be withdrawn by court order. This effectively locks up the funds, excluding them from use by the personal representative without the approval of the court.
Estate funds and cash deposited in these blocked accounts are not factored into the calculation of the bond amount, which can drastically reduce the cost of the bond. This is one common strategy used to lower the cost of the bond.
Discharging the Personal Representative and Cancellation of the Bond
The personal representative is required to be bonded during the course of his fiduciary role. This obligation ends once the court orders the final distribution of the estate.
Then the personal representative’s work is done, and the court discharges both the personal representative and the surety. They are released from any further liability, and the bond is canceled. The premium for the bond is considered a cost and is not recoverable, even if the estate closes within the first year. If, however, probate extends past the first year, and the annual bond premium has already been paid for that year, if the year has not completed, the personal representative may be entitled to a prorated refund.