Q.  My wife and I spend a substantial amount of time each year living in two other states, so that we can spend time living near each of our two children and their own families. We have our California estate planning documents created some time ago, but wonder whether we should create new documents in each of the other states, as well?

A.  Good question! While, technically, you do not necessarily need a separate set of estate planning documents created under each of the other state’s laws, nevertheless it might be wise to do so as to at least as to two of them, and here’s why:

The United States Constitution requires that each state give what is called “full faith and credit” to the laws of every other state in the union. This means that your estate planning documents created under California law should be honored in every other state of the union, without the need to create new documents in each of those other states. That said, however, the practical realities of dealing with California documents in other states might nevertheless create problems, especially as to your Durable Power Of Attorney (“DPOA”) and your Advance Health Care Directive.

If you both remain permanent residents of California, you should not need new wills or a new trust, yet as to your “DPOA” and your Advance Health Care Directive, it may be a different story:  you might very well meet some resistance if you attempt to use your California documents in those other states. Reason:  financial and healthcare institutions are used to seeing the documents commonly used in their own states and may refuse to honor out-of-state documents of which they are unfamiliar. Further, as to your Health Directive, other states may use different terms for the document, such as “durable power of attorney for health care” or “Living Will”.

Remember that the people at the bank, and the people in the hospitals, are not constitutional lawyers, and may therefore not know that they should fully honor your California documents. Therefore, I recommend that you consult an attorney in each of the other states and prepare at least a DPOA and the equivalent of a Health Care Directive, both in a form that is customarily seen and used in each of those other states.

Further, even as to your wills and trust, my recommendation is still to consult with a lawyer in each of the other states in order to make sure there are no special rules that might trip up your family in the event it became necessary to handle some of your estate affairs outside of California.

So, even though you could stand upon your constitutional rights to assert the validity of all of your California documents in the other two states, my suggestion is that, upon your next visits, you create new Health Directives and DPOA’s that would be easily recognized by financial and medical folks in those other states. When doing so, try to make them as similar as possible to your California documents, especially in terms of who is authorized to act as your agent, so as to avoid confusion in the event of need.

Q. It’s tax time again and I hear that the IRS may offer free tax preparation services to seniors. Do you know anything about this?

A. Yes. The IRS offers information on its site about free tax preparation software, fillable forms, and free taxpayer assistance, all available in an effort to make tax compliance easier, especially for seniors, those with a disability and those whose primary language is not English.

The free tax software is actually available from private vendors, but studies find that the availability of the free software is not well known and, in fact, is not easy to find on an Internet Search. It seems that, some years back, in an effort to increase the number of electronically filed returns, the IRS decided to encourage the use of tax preparation software.  In aid of that goal, the IRS entered into an agreement with private software vendors whereby the latter agreed to make their software available for free to low income persons, especially seniors, and in exchange the IRS agreed not to design its own free software to compete with those private companies.

Unfortunately, it seems that some of these companies have initiated computer code so that their free software is not easily “findable” on an internet search and the searches direct the user to software for purchase. As a result, the number of taxpayers actually using the free software is relatively tiny. For more, click on the following link.  The IRS has now amended its agreement with the software industry to bar the companies from hiding their free products.

That said, seniors and retirees should know that they can take advantage of free help to file their tax returns.  There are basically four (4) categories of free assistance, depending upon income, age, disability and facility with English, as noted below. In each case, seniors can go to the IRS website [IRS.gov] and type in the following words in the search bar: Free File: Do Your Federal Taxes for Free.  A screen will then pop up to give you choices, as follows:

1) Free Tax Preparation Software:  This option is for seniors whose Adjusted Gross Income (“AGI”) is less than $69,000.  Seniors who qualify can peruse the IRS site, choose their favorite vendor, and download free federal and state tax preparation software from vendors with such familiar names as Turbo Tax and H&R Block.

2) Free Fillable Forms:  Seniors whose income is above $69,000 for the year can opt for Free Fillable Forms, but must have a basic understanding as to how to do their own taxes.

3) Free Voluntary Assistance:  The Volunteer Income Tax Assistance (“VITA”) program offers free tax help to people who earn $56,000 or less, persons with disabilities and taxpayers with limited English speaking skills. IRS-certified volunteers provide free basic tax return preparation with electronic filing for qualified individuals.

4) Tax Counseling for the Elderly (“TCE”) program:  The TCE offers free tax help for all taxpayers, particularly those who are 60 years of age and older, and specialize in dealing with  pensions and retirement-related issues unique to seniors. The IRS-certified volunteers are often retired individuals associated with non-profit organizations.

You can find a location near you to obtain free assistance in any one of the following ways:

a) Call the VITA locator phone number at 1-800-906-9887; b) Call the AARP Foundation’s Tax Aid Program at 1-888-227-7669; c) Go to the gov web page, type the following into the search bar: “Free Tax Return Preparation for Qualifying Taxpayers”. Then Click on one of the two Locator Tools. Alternatively, you can just call one of these nearby locations: Hayward Area Seniors Center, Hayward: (510-881-6766); Eden Social Services Agency, Hayward: (510)271-9141; Laney College Ad Hoc, Oakland: (510-986-6947).

Of note, also, is that the IRS now also offers a simplified two page tax form designed especially for seniors. It is called the Form 1040-SR “US Tax Return For Seniors” and is designed to simplify the process for retirees.

Q. I heard that there is a new law which makes major changes to IRA’s and other retirement plans. Can you comment?

A. The new law, signed by President Trump on December 20, 2019, and effective January 1, 2020, is called the “SETTING EVERY COMMUNITY UP for RETIREMENT ENHANCEMENT ACT”, or the “SECURE ACT” for short. It was designed to promote more saving for retirement, but it may require seniors to rethink some of their estate planning. Following are the major changes:

  • Stretch IRA’s Limited. The biggest change eliminates “stretch” IRA’s for many beneficiaries. Under former law, your Designated Beneficiary (“DB”) could choose to take distributions over his or her lifetime and to pass what was left, after the DB’s death, onto future generations (called the “stretch” option). The required minimum distributions were then withdrawn each year based upon the beneficiary’s life expectancy. This allowed the IRA to grow tax-deferred over the course of the beneficiary’s life and to be passed on to his or her own beneficiaries, potentially “stretching” the payout over two or more generations. Unless the beneficiary is a member of one of five (5) favored categories (see below), the SECURE Act requires beneficiaries who inherit retirement accounts to withdraw all the money within 10 years of the original owner’s death. In many cases, these withdrawals will now occur during the beneficiary’s highest tax years, meaning that the elimination of the “stretch” option is effectively a tax increase for many beneficiaries. This provision will apply to those who inherit retirement plans on or after January 1, 2020.
  • Stretch IRA’s Still Available For Certain Beneficiaries: The “stretch option” is still permitted for the following beneficiaries: (1) the surviving spouse of the account owner; (2) Children of the owner, but only until they reach age 18; (3) Disabled persons; (4) Chronically Ill persons, and (5) Beneficiaries not more than 10 years younger than the account owner.
  • Required minimum distributions. Under prior law, the owner was required to begin taking distributions from his IRA beginning when he reached age 70½. Under the new law, individuals can now wait until age 72 to begin taking distributions.
  • No Age Cap on Contributions. The new law allows workers to continue to contribute to an IRA after age 70 ½, eliminating the former age cap.
  • Annuities. The new law removes roadblocks that made employers wary of including annuities in 401(k) plans by eliminating some of the fiduciary requirements used to vet companies and products before they could be included in a plan.
  • Withdrawals. The new law allows an early withdrawal of up to $5,000 from a retirement account without penalty in the event of the birth of a child or an adoption. Formerly, there was a 10 percent penalty for early withdrawals in most circumstances.

Given these changes, retirement plan owners (including IRA’s, 401K’s, etc. ) should review their estate plans, especially if they relied upon “stretch” options as an estate planning tool.  One way some did this was to name a trust as the beneficiary of their IRA. Those trusts should now be reviewed to determine if they need to be reformed to conform to the new law. If an IRA “stretch option” is part of your estate plan, you may wish to consult with your attorney or tax advisor to determine if you need to make changes.

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Gene L.  Osofsky  wishes to thank Harry Margolis, Esq. of MA for permission to use and modify his original article on topic.

Q. My wife and I would like to set up a basic estate plan. What are the essentials?

A. Many people believe that if they have a will, their estate planning is complete. But there is much more to a good estate plan. A good plan should be designed to avoid probate, minimize estate taxes, protect assets if you need to move into a nursing home, and appoint someone whom you trust to act for you if you become disabled.  Here is a list of the basics:

(1) Will: The most basic document is a will. A will directs who will receive your property upon your death and who will be your executor to see that your wishes are honored.  If you have minor children, it may also nominate guardians for them. But a will usually requires a probate proceeding, and only controls property that is part of your probate estate. Indeed, many people own assets which are not part of their probate estate, such as joint tenancy assets, life insurance policies, retirement plans, IRA’s, 401K’s, and annuities. The disposition of these non-probate assets is controlled by the form of title or by the associated beneficiary designation, and not by your will.  For example, property held in joint tenancy goes to the surviving joint tenant, regardless of what the will says.

(2) Durable Power Of Attorney (“DPOA”): In a DPOA you designate a person to act in your place for financial matters when you are unable to act for yourself.  The DPOA is usually considered a better alternative than a court supervised conservatorship, which can be cumbersome, public, and expensive. A DPOA can, if properly drawn, also authorize long-term care planning on your behalf.  But the DPOA ceases to exist upon your death, and therefore cannot function as a will-substitute.

(3) Advance Healthcare Directive: By this directive, you nominate someone to make health care decisions for you in the event you are unable to do so yourself. It usually also expresses your wish about end-of-life matters, burial and autopsy, and will authorize your agent to access your medical records and select physicians for you.

(4) Trust.  If you have a home or other significant assets, you should consider creating a trust. Unlike a will, a trust is designed to avoid probate and, upon your death, pass your trust assets to your beneficiaries in a manner which is usually speedier and less costly than a probate proceeding. Also, if you become incapacitated, a trust typically appoints a successor trustee to step in to handle your financial affairs on your behalf. Unlike the DPOA, a trust does not suddenly cease to exist upon your death, but remains in effect long enough to distribute your trust assets as you have directed.  In larger estates, trusts may also include provisions to minimize estate tax.

(5) Beneficiary Designations.  At the same time that you create an estate plan, you should also review all beneficiary designations on assets such as insurance policies, retirement plans and annuities. This is because these beneficiary designations override your will or trust, and you should make sure that your beneficiary designations are current.

A good estate plan should also be customized to your particular circumstances.  For example, if you are concerned about future long-term care expenses, you may wish to integrate long-term care planning into your estate plan so that you or your spouse may access available government benefits to help pay for care without depleting a lifetime of savings and impoverishing the survivor.

Q.  My late husband and I bought our home 40 years ago for $50,000, and we were then advised to take title as Joint Tenants to avoid probate. When he died 3 years ago, I was told by a realtor that it was worth about $1.2 Million. I was recently told by our CPA that, if I were to sell it, I would have a steep capital gains tax to pay. Is that so and is there any way around that.

A.  Yes, your CPA is correct.

Basically, capital gain is the difference between your net sales price and your original cost (plus improvements).  It is your “profit” from the sale of your home. Assuming no improvements, your capital gain in this situation would be  $1,150,000 ($1,200,000 — $50,000), before adjustments. But you are entitled to some adjustments to this total gain:

Date of Death Adjustment:  Under current tax law, when an owner dies, his ownership share gets an adjustment to its date of death value.  We often call this a “step up” in cost basis.  However, when a couple holds title in Joint Tenancy form, only the deceased spouse’s share gets the “step up”.  Yours does not.  So, in that situation, the adjusted cost basis would be $625,000, calculated as follows:

Husband’s ½ share:         $600,000

Your own ½ share:       +  $ 25,000 (1/2 of $50K purchase price)

Adjusted Cost Basis        $625,000

However, if you and your husband held title in Community Property form, then BOTH HALVES would get the “step up” in cost basis, and your adjusted Cost Basis would then be calculated as follows:

Husband’s ½ share:        $600,000

Your Own ½ Share:    +  $600,000

Adjusted Cost Basis      $1,200,000

In effect, by holding title in Community Property form you would get a “double step up”, which would wipe out all capital gain up to the date of death of your husband!

$250K Home Use & Ownership Adjustment:  In either situation, under the tax code you would also be entitled to claim a $250K capital gain exclusion available to an owner who has lived in the home at least 2 years before sale.  In the Joint Tenancy situation, this would help reduce – but not eliminate –the capital gain.  In the Community Property situation, this exclusion might not even be needed, except perhaps to the extent there were further appreciation between the date of your husband’s death and your actual date of sale.

So, is there any way to convert Joint Tenancy title to Community Property form after the death of your spouse?

Answer: Yes!  Assuming that you and your husband purchased your home with earnings and savings from your marriage, it would actually be community property in character under California law, even if it were not so titled.  In this situation, you might initiate a rather simple court proceeding called a “Spousal Property Petition”, asking a Superior Court judge to issue a Court Order finding that the home is, in fact, Community Property, passing to you without probate.  With such an order in hand, you could then claim the “double step up in cost basis” when reporting the gain on the sale of your home, dramatically reducing or even eliminating your capital gain and its corresponding tax.

One caveat:  While the IRS is not necessarily bound by a state trial court order, I have not known the IRS to dispute this procedure and have used it successfully in the past to eliminate capital gain in similar situations. [See Commissioner v. Estate of Bosch, referenced below.]

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References:  California Probate Code § 13650; Commissioner v. Estate of Bosch, 387 U.S. 456 (June 5,1967) [held:  where federal estate tax liability turns upon the character of a property interest under state law, federal authorities are not bound by the determination made of such property interest by a state trial court. If there is no decision by the state’s highest court, federal authorities must apply what they find to be the state law after giving “proper regard” to relevant rulings of other courts of the state. Id at pages 457, 462–466.

 

Q. My wife and I are considering making large gifts to our two children and four grandchildren, and we would like to do so in a way that is “tax wise”. Do you have any advice for us?

A. Yes. Many people mistakenly believe that you cannot gift more than $15,000 per year without incurring a gift tax. Not so. In fact, many will be surprised to learn that in 2019 an individual can actually gift more than $11.4 million during lifetime without incurring a gift tax, under the current Tax Cuts & Jobs Act (“TJCA”), which remains on the books through the end of 2025, unless extended by further act of Congress and the President. While a Gift Tax Return will be due for large gifts, there will be no tax if under the amount of that Lifetime Exemption Amount ! Here is the way gift taxes work:

Annual Exclusion Gifts: No Gift Tax Return Required:

1) $15,000 Per Year:  Each of you can gift up to $15,000 per year per recipient without the need to file a Gift Tax Return. Such gifts are called Annual Exclusion Amount (“AEA”) gifts and you can make such gifts to as many persons as you wish each year. As the name implies, none of these gifts would reduce your lifetime exemption.

2) “Doubling Up”:  If you and your wife are in a position to do so, together you can actually double that amount for each gift recipient. So, together, you could gift a total of $30,000 to each recipient for a total of $180,000 to your loved ones ($15,000 x 2 donors x 6 recipients), and none of these gifts would require the filing of a Gift Tax Return, the payment of any gift tax, or any reduction in your lifetime exemptions!

3) Year End Straddle: On or after January 1, 2020, you and your wife could do the same thing once again, as you would then be in a different tax year.  So, over the course of a period as short as a calendar week – provided that the week straddles both the last days of this year and the early days of next year — the two of you could gift a total of $360,000 ($180,000 x 2 Donors) to your loved ones without the need to file a Gift Tax Return, the payment of any tax, or the use any of your lifetime exemptions. I call this strategy the Year-End Gift Straddle. 

Gifts Above the Annual Exclusion: Gift Tax Return Required

1) Lifetime Exemption: If you choose to make gifts above the Annual Exclusion amount, then you can still make them gift tax free by using a portion of your Lifetime Exemption (also called the “Unified Credit” or Lifetime Exclusion). That Lifetime Exemption amount is currently $11.4 Million per person (2019), and will increase next year (2020) to $11.58 Million per person for U.S. citizens. Annual Exclusion Gifts do not count against this exemption; thus, AEA gifts can be made in addition to Lifetime Exemption gifts.  Also, by making a timely election, in a situation where one spouse has died, the surviving spouse can opt to preserve the deceased spouse’s unused exemption for the survivor’s own use, thereby effectively doubling it.

2) Gift Tax Return:  To the extent that your gifts exceed the $15 K per year AEA amount, you must file a Gift Tax Return — even though no actual gift tax would be due — if the excess gifts are still under the Lifetime Exemption Amount. Reason: the Gift Tax Returns are required for the larger gifts because the IRS wants to track your use of your lifetime exemption, so that it knows how much you have left to use upon death. Example: if you used $1 million of your lifetime exemption to make excess gifts during life, then your remaining exemption to apply against estate taxes upon death would be $1 million less.

Cautions:  Before making large gifts, be sure that you can afford to do so, and that your gift recipients will use the money wisely. Lastly, if there is a possibility that either of you may need to apply for a Medi-Cal subsidy for nursing home care within the next 2.5 years (soon to be 5 years), you should first consult a professional with special knowledge about the Medi-Cal program before making those gifts. Reason: Gift transfers may adversely affect your ability to qualify for a Medi-Cal subsidy unless those gifts are handled in a very special manner.

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For More Reading:  Forbes Article, “IRS Announces Higher Estate & Gift Tax Limits for 2020”

Q.  In past articles you have written about the option of seeking a Medi-Cal subsidy to help pay for the cost of nursing home care if that need arises. I have a Living Trust. Are there provisions that I should include, or some that I should avoid, in order to facilitate Medi-Cal qualification?

A.  Great question. While I cannot provide an exhaustive list in the space of this article, I can comment on one that is critically important: a Living Trust-based estate plan should permit amendment or revocation by a trusted agent if the trustor, himself, later becomes incapacitated.

Background:  When many people set up trusts, they provide that only they, themselves, are empowered to make amendments or withdrawals from the trust.  For persons in robust good health, that restriction makes perfect sense: they understandably do not want others tampering with their trust.

However, when those same individuals age, become infirm and face the need for nursing care, this restriction can become a financial obstacle.  Reason:  In order to invoke strategies to accelerate eligibility for a Medi-Cal nursing home subsidy, it is often necessary to first remove assets from the trust.

The problem arises where the infirm trustor does not then have sufficient mental capacity to sign documents to amend or remove assets from his trust in order to facilitate Medi-Cal planning. In that case, his family may be unable to invoke planning strategies to deal with excess resources and qualify him for Medi-Cal.  Without help from Medi-Cal, the cost of care in a nursing home could potentially drain the trust estate, to the financial detriment of the trustor and his family.

So, check to see if your trust provides that the right of amendment or withdrawal is “personal” to you, as the trustor. If so, you may have a problem.  Such a provision might read something like the following:

“The power to revoke or amend this trust is personal to the settlor and shall not be exercisable on the settlor’s behalf by a conservator, an agent under a power of attorney, or any other person or entity.”

If your trust contains a provision like the above, it could be the “poison pill” which later exposes your trust assets to rapid spend down in the event you need nursing care and are unable to qualify for a Medi-Cal subsidy to help with the cost.

Perhaps a better plan would be to change your trust now to authorize your trusted agent under a Durable Power Of Attorney (“DPOA”) to amend or revoke your trust in certain circumstances, such as if the need for nursing care arises. If you are concerned that such power might be abused, you might build restrictions into its exercise, such as by requiring the written certification of a physician that you need nursing home care, the approval of an attorney who practices in the field of Medi-Cal planning and/or the approval of a judge. If you have complete trust in your agent, then I would suggest not requiring the approval of a judge, as that approval would require a court proceeding, with its attendant delay, cost and uncertainty of outcome.

If you do opt to so modify your trust, be sure to include coordinating provisions in your DPOA, a legal requirement that is often overlooked.

Lastly, for those who no longer have capacity to change their trust, know that application can sometimes still be made to the superior court for permission to amend or revoke the trust when need requires, but the process  is expensive and the outcome may be uncertain.

Don’t let this period slip by without shopping around to see whether your current choices are the best ones for you.

During this period you may enroll in a Medicare Part D (prescription drug) plan or, if you currently have a plan, you may change plans. In addition, during the seven-week period you can return to traditional Medicare (Parts A and B) from a Medicare Advantage (Part C, managed care) plan, enroll in a Medicare Advantage plan, or change Advantage plans. Beneficiaries can go to www.medicare.gov or call 1-800-MEDICARE (1-800-633-4227) to make changes in their Medicare prescription drug and health plan coverage.

According to the New York Times, few Medicare beneficiaries take advantage of open enrollment, but of those that do, nearly half cut their premiums by at least 5 percent. Even beneficiaries who have been satisfied with their plans in 2019 should review their choices for 2020, as both premiums and plan coverage can fluctuate from year to year. Are the doctors you use still part of your Medicare Advantage plan’s provider network? Have any of the prescriptions you take been dropped from your prescription plan’s list of covered drugs (the “formulary”)? Could you save money with the same coverage by switching to a different plan?

For answers to questions like these, carefully look over the plan’s “Annual Notice of Change” letter to you. Prescription drug plans can change their premiums, deductibles, the list of drugs they cover, and their plan rules for covered drugs, exceptions, and appeals. Medicare Advantage plans can change their benefit packages, as well as their provider networks.

Remember that fraud perpetrators will inevitably use the Open Enrollment Period to try to gain access to individuals’ personal financial information. Medicare beneficiaries should never give their personal information out to anyone making unsolicited phone calls selling Medicare-related products or services or showing up on their doorstep uninvited. If you think you’ve been a victim of fraud or identity theft, contact Medicare.

Here are more resources for navigating the Open Enrollment Period:

From ElderLaw Answers.com and re-published here with permission.

Q.. My father recently died, leaving his home in a Living Trust. He also left several bank accounts, which together total about $100,000. Our problem: the accounts were never actually transferred into his trust. Is there a way to deal with them without going through probate?

A. Yes, there is. And, by the way, your question suggests that you know that a probate is a court proceeding supervised by a judge, usually requires the assistance of an attorney, involves lots of paper-work and compliance with procedural rules, and typically takes at least one year or more for completion, even where everything proceeds smoothly. In our experience, most families prefer to avoid a probate proceeding whenever possible.

So, in your situation, there may be two approaches to settling your father’s estate without probate:

1) Petition Court to Transfer Accounts To Trust: One approach would depend upon whether there is written proof that he intended to make his bank accounts part of his trust, but just never got around to doing it. Example:  he may have listed them in his description of assets appended to his trust, but perhaps never formally re-titled them into the trust. If so, then it might be possible to Petition the Superior Court for an order transferring them into his trust, so that they can then be handled – like the home—as part of the trust and without probate.  This is sometimes called a “Heggstad” Petition, so named because of the leading court case approving this procedure.  However, even this Petition would involve a court proceeding, require that you engage an attorney to prepare a written petition to the court, and would involve a short hearing before a judge.  So, at best it would involve what I call a “mini- probate”. See the References, below, for more background.

2) Use Small Estate Affidavit: An even simpler process would involve using the “Affidavit Procedure” for collection of assets that do not exceed $166,250 in value (as of deaths that occur or or after 01/01/2020).  This procedure, set out in California Probate Code § 13100, requires only the completion of an affidavit by the Successor(s)-In-Interest of your father, setting out the nature of the assets sought to be collected, the right of the Successor to receive them, and certain other recitals. That affidavit would then be delivered to each bank holding an account for your father, with the request that it comply with the law and turn over the account funds to the signer(s). Many banks even have forms for this purpose. Here, the successor(s) would typically be the named beneficiaries in your father’s Last Will (if he had one), or –if no Will – then the family members who would inherit his estate under the California law of Intestate Succession, i.e. the law which determines rights of inheritance where a decedent dies without a will. This law designates family members in a certain order of preference.

Of special note is that certain assets are excluded from the tally when determining whether this Small Estate Affidavit procedure may be used. They include:  assets held in a Living Trust, those titled in Joint Tenancy form, multi-party accounts with a designated surviving party (i.e. a Pay-On-Death Account), all vehicles and boats registered under the Vehicle Code, a mobile home, and earnings due from employment (up to $16,625 for persons dying on or after 01/01/2020).

New law: By the way, lawmakers in California recently passed a law which provides for a further adjustment in the threshold to enable the use of the Affidavit procedure every three years after after 2020, based upon an inflation factor.

In your case, it would seem that the Small Estate Affidavit procedure might be your best approach.

References: Text of new law, AB 473 (“Disposition of estate without administration”); Ukestad v. RBS Asset Finance Inc. (03/16/2015)(Estate of Heggstad (1993) 16 Cal.App.4th 943, 947–950, 20 Cal.Rptr.2d 433 (Heggstad ); California Probate Code § 850