For 2009, this amount is $3.5 million, and the highest rate is 45%.  It was set to completely disappear next year, and revert back to $1 million in 2011.  Which means, if nothing is done, those with very sizeable estates who pass away next year are “lucky” in a sense that they hit the estate tax jackpot.

This scenario is highly unlikely as I’ve written before how President Obama plans to freeze the current exemption, $3.5 million.  With proper planning, this tax can be avoided by most families, as $3.5 million is a fair amount.

California is one of a few states who do not collect any type of death taxes, estate, inheritance or gift.  Since 2005, estates don’t even have to file an estate tax return with California, because the US phased out a credit that the states received from the Federal tax.

What surprises me is that California is in such a financial mess, yet we haven’t heard any talk of an estate tax resurrecting itself.  They’ve increased taxes wherever they can, to much opposition.  But the budget is so unbalanced how long before we  see talk of implementing an estate tax at a lower exemption amount to capture more assets?  I hope they’re not reading this, I don’t want them to get any ideas!

Probate is expensive, often difficult, and may take a long time.   California Probate Code Section 10810 sets out the maximum fee attorneys can charge for probating an estate.  This fee is:

Four percent on the first one hundred thousand dollars ($100,000).  Three percent on the next one hundred thousand dollars ($100,000).  Two percent on the next eight hundred thousand dollars ($800,000).  One percent on the next nine million dollars ($9,000,000).  One-half of 1 percent on the next fifteen million dollars ($15,000,000).  For all amounts above twenty-five million dollars ($25,000,000), a reasonable amount to be determined by the court.

What’s that all mean?

• $100,000 estate will pay a $4,000 fee
• $200,000/$7,000
• $300,000/$9,000
• $400,000/$11,000
• $500,000/$13,000
• $750,00/$18,000
• $1,000,000/$23,000

The first kicker to all of this (yes there is more than one kicker!) is, the fee is calculated without regards to any loans or liabilities on the assets.  If you are single and pass away owning a house worth $500,000 with a mortgage of $250,000, it does not matter.  The fee will be calculated on the $500,000 amount.  The second kicker? The executor and the attorney is each entitled to the full amount of the statutory fee.  So that $500,000 estate may be subject to a maximum of $26,000 in fees for the executor and attorney alone. Of course either party may waive that amount and accept a lower fee.  Or they may not.

There are several ways to avoid probate, establishing and funding a revocable living trust is one of them.  Also, estates of less than $100,000 may skip probate as long as no real estate is involved. If there is real estate, it must be valued at less than $20,000 – good luck with that in California.  You may also transfer property to a surviving spouse outside of probate, and there are certain assets which are not included in your estate which include retirement plans (IRA, 401(k), pensions), life insurance not payable to the estate, and any joint tenancy accounts.

There may be some unique exceptions where probate would be desirable, such as disputes between heirs whereby a Judge’s oversight and control may be needed.  In most cases however probate in California is a very onerous, public and costly process.

• If you have a surviving spouse or domestic partner, all community property and quasi-community property is given to that spouse/partner. 
• If you pass away with separate property then your spouse/partner receive 100% of separate property if you leave no children or children of your children, parent, brother, sister or children of deceased brothers and sisters. 
• This number drops to 50% if you only had one child (or children of one deceased child), or at least one parent, brother, sister or children of any of them
• This number drops further to 33% if you had more than one child, or one child and children of a deceased child, or children of two or more deceased children

That is just what your surviving spouse or domestic partner receives if you die without a will.  The rules that determine what your other heirs get, if anything, are even more complicated.  And if you have no heirs at all?   Your assets “escheat” to the state which means they get your assets.

The point is, if you have an estate of any decent size you will want to, at a minimum, do some basic planning that directs who gets your assets upon death.