What You Need to Know About Avoiding Probate in California
Estate tax is calculated based on the net value of all the property owned by an individual at the date of their death. In contrast, an inheritance tax is calculated based on the value of bequests, or property given by will, received from a deceased person’s estate. Probate, or the legal process that happens after someone has died, can and should be avoided if possible. Here’s how to avoid probate in California Estate and Inheritance Tax.
There are several reasons as to why an individual should avoid probate in the formulation of their will/estate. Probate is time-consuming and can prove to be expensive for heirs. Furthermore, since probate is a public process, there is an inherent lack of privacy throughout the said process. It is important to discuss avoiding probate with one’s estate/inheritance planning attorney and assess different options for probate avoidance. In contrast, individuals should strive to avoid inheritance tax as well; subsequent earnings on inherited assets are taxable unless it comes from a tax-free source.
Related: California Probate: What You Need to Know
Avoiding Probate in California Estate
There are ways individuals can protect their assets by avoiding probate so that they can pass the maximum amount possible down to their heirs. Here are some ways to avoid probate in California Estate:
Living Trust
Individuals looking to avoid probate can create a living trust under California law on any asset they own. To do so, an individual must create a trust document, naming someone to take over as trustee after their death. The successor trustee will then be able to transfer the assets to the trust beneficiaries without probate court proceedings.
Related: Intestate Succession in California: The Basics
Joint Ownership
If property is jointly owned between two people, and this ownership includes the “right to survivorship,” then the surviving owner automatically owns the property once the other owner dies. No probate is necessary for the transfer of property.
Payable-on-Death Designations
Individuals can add a payable-on-death designation to bank accounts, and when they die, the beneficiaries they have designated can claim the money directly from the bank without probate proceedings.
Transfer-on-Death Deeds for Real Estate
California allows individuals to leave real estate with transfer-on-death deeds. The beneficiary has no rights until the individual’s death; the beneficiary claims the real estate and can avoid probate court proceedings upon the death of the owner.
Avoiding Inheritance Tax
There are a few ways individuals can protect their beneficiaries from inheritance tax:
Consider the alternate valuation date
In some cases, an executor might just have a different alternate valuation date, which is 6 months following the date of death, if they feel that the market value of the estate is not a fair estimate. This is only available if it will decrease both the gross amount of the estate and the estate tax liability. This will often result in a larger inheritance for the beneficiaries. If the estate is not subject to estate tax, then the valuation date is the date of death.
Minimize retirement account distributions
Inherited retirement assets are not taxable until they are distributed. If the beneficiary is a spouse, minimum distributions would begin at 72 years old. If the beneficiary is not a spouse, an individual can transfer their funds into an IRA in their name. Beneficiaries must begin taking minimum distributions the year following the date of death, even if they are not 72.
Give away some money
By giving money away, individuals can avoid their beneficiaries having to pay taxes on their inheritance. They could also receive a tax deduction if the individual donates to a charitable organization. It may be useful to give beneficiaries annual gifts while still living, without giving too much (or else one is subject to a gift tax, which is more than $15,000 in 2020).
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If you have any more questions about avoiding probate in California Estate and Inheritance Tax, contact us. Get your free consultation with the most qualified attorney for your unique legal situation!