Is an under $150,000 probate petition always better?

UPDATED MARCH 9, 2021 to reflect current law of $166,260

There are many different probate options. Knowing which is right for YOUR CASE depends on the facts of YOUR CASE.  There is not a simple rule. There is no one size fits all.  Each case is unique.  For example, let’s say you have a piece of real property worth about $165,000 in Sacramento. That is your mom, or other loved one, died with this property in their name and no other assets.

The first instinct of most people is to do a probate code 13150 succession to real property worth under $166,250 (this number was $100,000 until January 1, 2012 and $150,000 until January 1, 2019). There are less attorney fees, less Court costs and it’s much faster than a full probate. However, is that best for every case?

As you probably have guessed the answer is NO, of course not.  An under $166k succession is probably good for the majority of people but not all. Let’s delve into this further.

I have a case right now where the client’s mom died owning a house that would show comparable value (i.e. “comps”) of around $200,000.  However, the real world value is probably more like $165,000 due to the horrible condition of the home. In particular the inside of the home is in almost uninhabitable condition. We could easily do a small estate probate as the total assets are under $166,000 as there is little doubt we could prove to the California probate referee that the asset is worth under $166,250.

By forcing the above house into a small estate we will only incur Court costs (court filing fee, inventory, certified copy and recording fees) and attorney fees which would total to $6,500 as it’s a pretty straight forward case.  A full probate might cost $9,000 between costs and fees.  Thus about a $2,500 difference. Obviously the small estate is better because it costs $2,500 less and only takes 2 months.

Not so fast….  In this case my client wants to keep mom’s house as a rental and maybe sell it in 5 or 10 years.  Have you heard of a thing called the capital gains tax?  The capital gains tax is an income tax (both federal and state) on the gain upon a sale.  The tax, for rough math let’s say 15% federal and 10% state, is assessed upon sale on the difference between basis and sale price.  Now the punchline… what’s the basis?

If we do a small estate the highest possible value would be $166,250 and that would establish the basis.  On the other hand the probate referee would easily appraise it for $200,000 if not $225,000 if we tell the probate referee about some of the home’s better qualities. The key here is the probate referee does not go to the house and even in the rare case that they do go to the house they don’t go inside; it’s a “drive by” appraisal.

We thus can easily have a basis difference of $50,000.  A basis of $166,250 with a small estate and $200,000-225,000 with a full probate. If that property is sold for $215,000 in 5 years there would be about a $50,000 capital gain (simple math here) or a ZERO capital gain if this client had done a full probate.  The capital gains tax would be $12,500 approximately as an estimated total between the IRS and California FTB.  By spending a few more thousand now they would avoid this capital gain tax in the future.  Plus, of course we all hope the property is worth a lot more than $200,000 whenever it is sold and capital gains tax rates are historically low right now and thus could easily be higher in the future.

Why else would you want to do a full probate rather than a mini probate? There are many. I don’t have time today to go in-depth but here are some basic thoughts:

– Control –  That is control to sell the house most notably if there are multiple beneficiaries.

– File tax returns – If you don’t have a full probate you do not have “Letters” (the court document which puts you in a position of authority to sign on behalf of the decedent). Without letters how would you file tax returns? Thus you can’t clean up loose ends of taxes nor can you claim tax refunds!

– Organization – When there are lots of small assets, and possibly more that might be found later, a full probate makes things easier.

– Administrator’s Fee – Maybe you want to skew money toward you!? Even a $100,000 estate would create a $4,000 Administrator’s fee. Let’s get that for YOU rather than you having to split with others!

– Creditors – Do you want finality? Do you want to make sure creditors don’t come after you in the future? A full probate gives finality that a mini probate does not.

– Family Buy out – What if we want to enter into a distribution agreement? A full probate would be the easier place for that and increases the odds of keeping the parent to child exclusion in place so that property taxes don’t rise!

There are, of course, many other situations where a full probate is more practical and the better alternative than a mini probate. That’s not to say it’s always the case as there are many times a small estate succession petition makes more sense.  The key is talking to a California probate lawyer who knows the ins and outs of each to make sure you file the best for your case!

Contact me to discus your case!


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