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Vancouver Couple Purchasing Indian Wells Real Estate, What is the Best Form of Home Ownership to Avoid Costly California Probate Fees, Part 2

So we’re continuing our discussion of why, for the sole purpose of avoiding or minimizing the probate costs of the Canadian snowbird, a trust is likely the best way to own your Palm Springs area home. Remember, probate is the legal process your estate goes through when you die. For the Canadian snowbird who passes away from Vancouver with a vacation house in Indian Wells, there is probably already a probate which must occur back in British Columbia. If at all possible, why make it two? It’s expensive, it can be difficult due to the international component, and can be time consuming (maybe even takes over a year). And by the way, the same analysis holds true for somebody whose permanent residence is in Japan or Germany, or even for somebody whose permanent residence is in Michigan. So if you’re not living permanently in California, you probably would rather avoid a second costly probate (which would occur in California). We will call the second probate in California (the one we’d like to avoid if possible), the “ancillary probate”. Review our last post for an overview of the costs of the California probate process.

Let’s Revisit our Various Forms of Property Ownership, and Review Whether, Upon the Death of a Canadian Snowbird Owner, a California Ancillary Probate is Required.

Property Owned by Individual– If Larry from Vancouver owns, in his name alone, a house in Indian Wells, upon his death a California probate is required to determine who inherits Larry’s Indian Wells house (i.e., so while the rest of Larry’s estate is likely going through the primary probate in process back in BC, the estate has no choice but to also pay for the expensive costs of an ancillary probate in California). As a side note, the California court would likely admit Larry’s Canadian will to determine who to distribute the Indian Wells house to.

Property Owned by a Couple as Tenants in Common– If Larry and his wife Helen, both from Vancouver, owned their Indian Wells house as tenants in common, upon the first to die of either Larry or Helen, the property must go through a California probate to determine who inherits Larry or Helen’s interest in their Indian Wells home (probably the survivor of the two). Talk about needless. Only one of the two owners passed away and we still have to go through an expensive California ancillary probate!

Property Owned by a Couple as Joint Tenants– Joint tenants are considered “co-owners” of the entire property. So as joint tenants, if Larry or Helen dies, then the survivor automatically takes over the entire property without probate required. When the second of the Larry or Helen dies, then a probate will be required to determine who inherits their Indian Wells home.

Property Owned by a Partnership or a Corporation (including an LLC)
Provided all the partners or shareholders of the partnership or corporation, respectively, are domiciled (where they permanently reside) outside of California, upon the death of Larry or Helen, as a partner or shareholder (of the partnership or corporation which owns the Indian Wells house), a California probate should not be required. This should convert the real estate into an intangible asset that will be subject to probate in Larry/ Helen’s home jurisdiction (British Columbia) but not in the jurisdiction where the property is located (California). This, of course, will not eliminate probate altogether, just the ancillary probate in California. So while ownership thorough a partnership or corporation does not likely require a second probate (in California), it likely increases fees required for the primary probate (in this case back in Vancouver). It will also add significantly to the time to transfer the California property to the new owner (it can’t occur until the Canada probate is concluded).

Property Owned by a Revocable Living Trust– Larry and Helen can title their Indian Wells house into the name of their revocable living trust. That way, the house can either be transferred directly to the beneficiaries Larry and Helen have named in their revocable living trust to receive their assets after they die, or sold by the successor Trustee they have named to manage and distribute the trust property after they die. We view this ownership as the best method to avoid California probate costs.

Why is a Revocable Living Trust Likely the Best Method to Avoid Probate Costs?

The basic reason is that the Indian Wells house will not have to go through an expensive California probate when one, or both, of the owners dies. This happens when the house is owned individually, or as tenants in common (upon the first of the couple to pass away), or as joints tenants (upon the second of the couple to die). In addition, while owning the house through a partnership or a corporation will probably not require a second California probate, the value of the partnership interests or corporation shares will likely be added to the value of decedent(s)’ assets in the primary probate (back in Vancouver in our example). Assuming British Columbia probate costs are also based on the value of the assets being probated, then the primary probate becomes that much more expensive. Also, this will add significant delays to the transfer of the Indian Wells property. So a trust is likely the best way to avoid costly probate fees on the value of the Indian Wells house altogether, in addition to being the most efficient way to affect the transfer to those who inherit the Indian Wells house (probably the kids).

One final note on Canadians using US revocable trusts- it is our understating that in Canada, when one contributes a property to a US trust, the contributor must pay tax on the gain in the value the house (if any) at the time of contribution. So Canadians may be wary of contributing a significantly appreciated property to a US trust due to the Canadian tax implications. We will talk about this more down the road.