When a person dies, they may have a home that must be disposed of. The decedent might include it in a will and decide what happens to that property. In other cases, the deceased person doesn’t have a will to direct the disposal of property. Sometimes, a probate sale is necessary. It’s important for the heirs to understand the process, why it’s necessary, how it works and whether to buy through a probate sale.
With a probate sale, the owner of the property died and didn’t leave a will that left the home to anyone. To complete the probate process, the personal representative or estate attorney will need to sell the property. The proceeds from the sale will be distributed to the heirs after all debts and taxes are paid. A probate sale can be a lengthy process because the court supervises the sale and approves the transaction. It’s often a complicated task, which is why many personal representatives hire an estate attorney to handle the process.
How a Probate Sale Works
One of the first steps in organizing a probate sale is to hire a real estate agent to post the listing, show and sell the house. It’s a good idea to hire someone with experience in probate sales because they will be better prepared to know what to expect in the process. Once a buyer makes an offer on the property, the estate’s representative must decide to accept the offer. The court must then approve the sale, which can take 30 days or even longer before the buyer finds out if they can move forward with the transaction. Should You Buy a Probate Sale?
A probate sale isn’t right for everyone. To determine if a person should consider this option, they must decide what is most important to them getting a house quickly or getting a good deal. Many probate homes sell for below market value, but the process can take much longer than a traditional purchase. Another issue in deciding whether to pursue a property in a probate sale is the cost of repairs/renovations. If you can do the work yourself or have the money to hire professionals, a probate sale may be a good place to find a house. People, who flip houses for a living often go this route to find cheaper properties, fix them up and resell them at a profit. On the other hand, if you have limited time and money for repairs and renovations, a probate property may not be the best option. If the thought of the unknown concerns you, a house in a probate sale is not a good idea. Often, the buyer knows little about the house when purchasing through a probate sale. Even with an inspection, you may end up with unseen issues that cost hundreds or even thousands of dollars to repair. In the end, you must decide if the benefits outweigh the disadvantages of buying through a probate sale.
Why is a Home Sold Through a Probate Court?
A home is sold through probate when it is owned by someone who is deceased. They didn’t leave a will to dictate who should have the property or it was meant to be sold and the proceeds divided between the heirs. A personal representative or executor may also need to sell a house to pay for outstanding debts. If the decedent didn’t have enough liquid assets to pay off creditors and taxes, other assets would need to be sold to cover those expenses. Most debts don’t end when a person dies. Instead, they follow the estate. A house must be sold through probate court because the court is in charge of the estate until it’s closed. The court must approve of the sale before the transaction can be completed and the buyer take possession. The personal representative is designated to take care of the tasks associated with dispersing the estate, but they have no power or ownership of the assets. The court is responsible for making sure the terms of the will are followed or that the estate is handled according to the laws of the state.
Features of a Probate Sale
There are several features unique to probate sales compared to other property sales. One feature is the fact that most properties are sold as-is. The heirs and personal representative don’t want to pay for updates or renovations, or the estate may not have funds to afford those costs. However, buyers may still want to get a home inspection just to be sure there aren’t any surprises they can’t handle. Even with an inspection, they may end up with a home that has hidden issues which turns into major expenses.
Probate sales also require the buyer to come up with a deposit when they put in an offer. The deposit is in addition to the down payment they are making. However, the deposit can be put into the down payment if the transaction is completed. The deposit will be ten percent of the sale price of the property. Some states allow the property to remain listed and other buyers to make offers. If the original buyer is outbid, they should get their deposit back, but they will lose out on the house unless they make a higher bid. The timeline is another unique feature of a probate sale. Closing can take months because it can’t happen until the court has approved the sale.
A probate sale is a viable way to get rid of property owned by the deceased person and to add the proceeds to the estate for distribution. It is a complicated process that can take longer than a regular sale. It’s important to understand how this process works if you are on either the selling or buying side of the transaction. It’s also a good idea to work with an estate attorney who can handle this complex task to make sure it is done correctly and in as short of a timeframe as possible.
How Property Ownership Impacts Estate Planning
Property is titled according to one of three basic concepts: sole ownership, joint ownership, or title by contract. Assets can only be titled in one of these three ways, but each can include one or more variances.
Sole ownership means that a property is owned by one person in their individual name and without any transfer-on-death designation. Examples include bank accounts and investment accounts held in one individual’s name without a “payable on death,” a “transfer on death,” or an “in trust for” designation. A property is titled in one individual’s name in “fee simple absolute” in real estate. The individual owns 100% in their sole name, with title being transferred to someone else at the time of the owner’s death.
Joint Ownership With Right of Survivorship
Joint ownership can come with right of survivorship or without it. Joint ownership with right of survivorship means that two or more individuals own the account or real estate together in equal shares. The surviving owner or owners continue to own the property after one owner dies. They automatically inherit the deceased’s share by operation of law. No joint owner can bequeath their share of the property to anyone else. The co-owners have a legal right to it when a joint owner dies. No owner can sell the property or encumber it with liens or mortgages without the consent of the other(s), although they can sell or encumber it jointly.
Tenancy by the Entirety
“Tenancy by the entirety” is a special type of joint ownership with rights of survivorship between married couples. It’s recognized in most states that don’t observe community property law, but not all. Each spouse has an undivided interest. Neither spouse can transfer, encumber, or bequeath the property without the other’s consent.
“Community property” is another special type of joint ownership reserved for married couples in nine states: Arizona, California, Idaho, Louisiana, New Mexico, Nevada, Texas, Washington, and Wisconsin. This type of ownership does not necessarily come with survivorship rights. Spouses can leave their 50% ownership to anyone they want when they die if they bequeath it in their estate plan, but the property will go to the surviving spouse if they fail to do so. The last surviving owner is free to do whatever they want with the property in community property states, assuming the decedent hasn’t bequeathed their share to someone else.
Tenants in Common
Joint ownership without rights of survivorship is typically referred to as owning the property as “tenants in common.” Two or more individuals own a specific percentage of the account or real estate, but not necessarily equal shares. One individual might own 80%, while a second individual owns 20%. Joint co-owners can pass their shares to beneficiaries under the terms of their wills or other estate plans in this type of deed. Probate would be necessary to transfer the asset.
Title by Contract
“Title by contract” refers to assets that bear a beneficiary designation that names an individual or individuals to receive them after the owner dies. This type of title includes bank accounts or investment accounts that have a “payable on death,” “transfer on death,” or “in trust for” beneficiary designation. Title by contract also includes life insurance policies that have designated beneficiaries, as well as retirement accounts such as IRAs, 401(k)s, and annuities. Life estate deeds designate a “remainder man” to inherit real estate in this way, and transfer-on-death or beneficiary deeds also have designated beneficiaries for real estate.7
Non-probate assets don’t have to go through the court-supervised probate process after the owner dies, because there’s already a means in place to move the asset from the ownership of the deceased to living individuals. Other owners or beneficiaries take control of the deceased owner’s assets by operation of law simply because they survived the deceased owner. Non-probate assets include assets owned jointly with right of survivorship, including tenancy-by-the-entirety property and some community property. They include any type of asset that has bears a beneficiary designation to transfer it after the owner dies.
When Assets Go Through Probate
As the name suggests, probate assets must go through a court-supervised probate process after the owner dies, because probate is the only way to get the asset out of the deceased owner’s name and into the names of the beneficiaries. Probate assets include sole-ownership property, tenants-in-common property, or any other asset owned jointly without right of survivorship.
Who inherits probate assets depends on whether the owner has left a last will and testament. The terms of the last will and testament should dictate beneficiaries if the owner left one. Otherwise, the intestacy laws of the state where the owner lived at the time of death will determine who inherits the owner’s assets, as will the intestacy laws of any other state where the owner owned real estate. Laws for intestate succession typically begin with the surviving spouse, then consider direct descendants. More distant relatives rarely inherit unless the deceased’s spouse or children are no longer living or if the deceased never married or had children.
The Risks Of Selling A Home Before Probate
If a person sells the home of an estate before probate, they run certain risks. This potential liability often extends to real estate agents acting for the sale of the home. For example, the risks, which vary by situation, include:
• A new will comes to light with different beneficiaries, executors;
• The will gives the home to a specific person who wants the home, not the sale proceeds;
• A family law contract or dower rights, supersedes the will and someone else takes priority in terms of the home;
• One of the beneficiaries wants the home, and wishes to receive the home as their share of the estate; and lastly
• The person trying to sell the home, does not have the right to do so.
One of the most important reasons to initiate a life estate process is to avoid probate court and processes. These often take at least six months, and if there are any challenges, inherited estates may take years to obtain properly. When the title is only in the name of the deceased at the time he or she dies, it must go through probate in the event of a last will or testament. However, there are other legal documents and methods that may bypass this such as a trust. It may be advisable to hold the property in multiple names with rights of survivorship or with spouses that are tenants by the entirety. Similar procedures could be beneficial as well.
There are benefits of taxation provided the value of the property does not increase after the death of the previous owner after the real estate is inherited. This then ensures capital gains are avoided unless the value increases. The estate may be used to protect the owner or others for possible long-term care. It may be preserved to plan for the future. However, this may cause a five-year transfer until the protection is in place. In some instances, this may lead to a lien on the property, but this is usually only for the value of the life estate and not the whole value of the real estate property.
Life Estate Responsibilities
The life tenant of a life estate still has the usual responsibilities as if he or she were still the owner such as paying mortgages, paying all applicable property taxes, keeping insurance and repairing issues on the house or land. The life tenant must also ensure there are not issues with the documentation about the estate going through a life estate transaction. This may then lead to the person hiring a real estate lawyer to ensure the processes are legal, the contracts are clear and all other procedures are followed as necessary. The legal professional may also work with or for the life tenant behind the scenes or find other professionals to assist such as an accountant or tax preparer.
Individuals who are considering drafting a trust or a will may wish to consult with an estate planning lawyer. He or she can explain the advantages of using a trust as well as a will. He or she can make recommendations based on the specific considerations of the client. He or she may even recommend using both documents, such as by using a pour-over will that places any property owned at the time of the testator’s death into the trust.