Transferring Real Estate to Heirs: Issues that Can Arise Without a Will

A person can leave real property specifically to someone in a will or trust. For example, a father can leave a residence or vacation home to one of his three adult children by simply listing it in his will.

Real estate can also be left to heirs as part of an individual’s net estate or residuary estate. This is the portion of an individual’s assets that remain after all specific gifts and bequests have been made and all claims, taxes and other debts of the estate are satisfied.

For example, the father has a will and leaves specific items (artwork, jewelry) to each of his three children. His will then specifies that the rest of his assets are to be divided equally among the three children. Any real estate he owns is part of the net or residuary estate.

Without a Will

If someone dies without a will, the real property passes by “operation of law,” to the next of kin pursuant to the intestate law of the state. This is the law governing how property is distributed when someone dies without a will. State laws can vary significantly. Operation of law means that nothing has to be put in writing to cause the heirs to inherit the property.

When filing a petition for probate or estate administration, the court will want to know the value of the property and whether or not it is an income producing property (for example, a rental property). Depending on the property value, who is handling the estate and who will inherit the property, the court will determine whether to restrict the sale of the property without court approval. The court will also want the executor or personal representative to account for the rental income of the property if it is a rental property.

Bills to Pay and Records to Keep

Difficulty usually arises immediately after death if there are bills to pay or rent to collect. For example, there may be mortgage, utility or property tax payments. It may take a few weeks before someone is appointed as the executor or personal representative. Or, in some cases, no one decides to petition the court. Some heirs may take it upon themselves to pay bills or collect rent. These heirs must keep a strict accounting of the finances because later they may be accused of malfeasance, which includes acting in their own self-interests and fraud.

In addition, in order to be reimbursed by the estate, heirs must keep strict records. Unfortunately, some heirs don’t petition the court for a long time — even years — to officially begin the probate or estate administration process. This can result in claims of wrongdoing.

Further, it is generally in the best interests of the estate to distribute or sell the property in a timely manner. The longer the property stays in the estate, the more likely there might be a legal challenge about the handling of the sale, the distribution to heirs, the collection of rent and/or the payment of expenses.

Feelings of Entitlement among Heirs

Unfortunately, a common occurrence is when one sibling in a family believes — for one reason or another — that he or she is entitled to more than what is permitted by law. For example, let’s say that a mother with four children lives in a home, which she owns free and clear, with one of her daughters. The other three siblings live out of state and rarely visit. After the mother dies without a will, the daughter who lived with her believes that she should receive the home and be able to continue living there. However, the law is likely to treat the property as an asset that must be divided equally among the siblings.

Let’s further assume that the daughter who lives in the home petitions the court to become the executor or personal representative. The court appoints her. If she refuses to sell the property and distribute the money to the rest of the siblings, the heirs would have to petition the court for an accounting and removal of their sister as executor or personal representative for breach of fiduciary duty. The sister would be required to have a justifiable reason why the property was not distributed.

If upon distribution, there is disagreement on what to do with the property, one of the heirs can petition for a partition and sale of the property. In other words, force the sale of the property to a third party or have an heir “buy out” the other heir(s).

Overall, keeping real property in the estate for an extend period of time is not looked upon favorably by courts.

If you don’t have a will, consult a WFY tax advisor at info@cpa-wfy.com for a recommended estate attorney to draft one so that your wishes are carried out. If you believe you are the heir of an estate with real estate — and the decedent did not have a will — speak with your attorney about how to handle these issues so they do not get out of hand.

What if an estate includes real estate in another state from the one the decedent lived in? If there is no will, the property will be handled under the intestate laws in the state where the property is located.

For example, let’s say you live in the northeast United States but you own a vacation home in the south where you spend winters. If you die without a will, the vacation property will be passed to your heirs under the laws of the southern state. The laws in that state may be vastly different from the laws in the state where you have your principal residence.