Profits In Probate Real Estate - Part 1 INTRODUCTION
One of the proven methods of building a person’s net worth is
through a sound investment program in single-family homes. Many
fortunes have been created using this tactic and everyday people with the
foresight and the determination to gain the necessary knowledge and put it
into action have done it. Knowledge, Action and Persistence – those are
the keys.
Books have been written and seminars taught on the step-by-step
process that could lead the part-time investor down the road to financial
freedom. The best part is that it really works – if you do!
Most all of the real estate programs are based on finding homes that
can be purchased at below market prices. There are many other aspects
to the plans, but buying bargains is central to all of them. You make your
profit when you buy. Buying below market also protects your investment if
there should be an unexpected downturn in the real estate market.
The investor’s challenge is to consistently find property she can buy
at bargain prices. To do that an effective prospecting plan is needed and
the information presented here can be a productive part of that plan.
One of the most popular means of finding bargain property is to follow
the “For Sale By Owner” ads in the classified section of newspapers. By
faithfully calling these people every week (or sending a mailing) the
investor will uncover motivated sellers who will take less than full value for
their home. If the investor could buy just one or two houses each year she
would be well on the road to financial freedom. Buying one a month can be
an achievable goal for the determined.
Yes, there are other methods for uncovering bargain buys -For Sale
By Owner ads, properties facing foreclosure, “fixer” properties, fed up
landlords, etc. The keystone of all these plans is to find property that you
can buy with bargain terms or below market price. That’s exactly what you
will find in probate properties.
1.
The Opportunity
When a property owner dies many legal wheels are set into motion.
The direction these wheels will turn is based on the condition of the
estate at the time of death. Had the deceased planned well for the period
following death? Were tax considerations taken into account? Were trusts
established? Was a will carefully prepared? Were heirs provided for?
In many cases only the most basic planning was accomplished.
There may be a will and little else. The manner in which that will was
prepared and the laws in each state govern the method for distribution of
the deceased’s wealth.
You need to understand some basics about probate, estates and the
passing of assets.
PROBATE – THE PROCESS
Probate is the process that transfers legal title of property from the
estate of the person who has died (“decedent") to the proper beneficiaries.
The term "probate" refers to a "proving" of the existence of a valid
Will, or determining and "proving" who the decedent’s legal heirs are if
there is no Will. Since the deceased can't take it with him, probate is the
process used to determine who gets his or her property.
The primary function of probate is transferring title of the decedent’s
property to his heirs and/or beneficiaries. If there is no property to transfer,
there is usually no need for probate.
Another function of probate is to provide for the collection of any
taxes due by reason of the deceased's death or on the transfer of his or her
property. This can be the heir’s motivation for a quick sale of property. The
taxes have to be paid soon after death and the estate may need funds to
pay them.
The probate process also provides a mechanism for payment of
outstanding debts and taxes of the estate.
2.
Probate establishes a deadline for creditors to file claims (thus
foreclosing any old or unpaid creditors from haunting heirs or beneficiaries)
and for the distribution of the remainder of the estate's property to ones'
rightful heirs.
Generally it is necessary to go through probate or, in the case of
smaller estates, a less formal procedure that is still under the general
supervision of the probate court, before the deceased's property can be
legally distributed.
Even if a person dies with a Will (which is known as dying "testate"),
a court generally has to have an opportunity to allow others to object to the
Will, and if there are any objections, to determine if the Will is valid,
because it is always possible that:
* There was a later Will (which, if valid, would replace the older Will), or
* The Will was made at a time the deceased was not mentally competent
to make a Will, or
* The Will was the result of fraud, mistake or "undue influence" or
* The Will was not properly "executed" (signed), or
* The so-called Will is actually a forgery, or
* For some other reason (such as a pre-existing contract) the Will is not
fully valid, or
* There are other claims against the deceased's estate that impact what
the beneficiaries under the Will would receive.
For example, if the deceased owned real estate in his own name, no
knowledgeable outside person would accept title to the property, and no
bank provide a new buyer mortgage money, unless the estate went through
probate so "clear title" could be given the new buyer. Few outsiders would
enter into any other transactions involving the deceased's property before
the Will is "admitted to probate" and/or someone is lawfully appointed to act
for the estate.
3.
Not all property must be processed in probate to transfer legal title
from the deceased’s own name to his or her beneficiaries or heirs. Most
states also allow a limited amount of several types of property to pass to
certain beneficiaries free of probate, or through a simplified probate
procedure.
Real and personal property owned as a joint tenant passes to the
surviving co-owners without going through probate.
Other types of benefits, such as a life insurance policy or annuity
payable directly to a named beneficiary, bypass probate. Money from IRAs,
Keoghs, and 401(k) accounts transfer automatically, outside probate, to the
persons named as beneficiaries. Bank accounts that are set up as payable-
on-death account (POD for short) or an "in trust for" account with a named
beneficiary also pass to that beneficiary without probate.
If a Living Trust holds legal title to some of the property, that also
passes to the beneficiaries without probate. (The Trust is a legal entity,
which survives you after your death.)
Probate usually occurs in the appropriate court in the State and
County where the deceased permanently resided at the time of his or her
death. Such courts go by different names in various states. In many states
the court is simply called the Probate Court. However, in some states they
go by different names. In New York, for example, the probate court is
known as the Surrogate’s Court while in California it is the Superior Court,
Probate Division.
The probate court usually handles all the personal property the
deceased owned, plus all of the real estate that the deceased owned that is
located in that same state.
The laws of the state in which the deceased was a permanent
resident or "domiciliary" govern who would receive all the deceased's
personal property, wherever it was located, and all the deceased's real
property located within the state. Thus probate almost always is undertaken
in the home state.
Where the decedent owned out of state real property, the laws of the
state where the property is located govern who gets it (unless there is a
Will).
4.
If there is no Will Probate is usually required in each state where the
real property is situated, in addition to the home state.
Even if there is a Will, after it is admitted to probate in the home state,
it usually must be submitted to probate in every other jurisdiction in which
the deceased owned real property. That separate probate procedure is
formally referred to as "ancillary probate". Some states insist upon the
appointment of a Personal Representative (PR) who is a local resident to
administer the in-state property.
Where the deceased did not have a Will, each state will have its own
unique pattern for distributing the deceased's real property. The real estate
in State A all might go to the spouse, in State B it might go 1/3rd to the
spouse, 1/3rd to the son and 1/3rd to the daughter, and in State C it might
go 1/2 to the spouse and 1/4 each to the son and daughter.
THE PERSONAL REPRESENTATIVE
The Personal Representative (PR) (sometimes also referred to as the
"executor" if there is a Will, or the "administrator" if there is no Will) is
appointed as part of the probate proceeding and has the responsibility for
managing the estate through the proceeding, subject to established
probate rules and procedures.
In many states, the probate court has a considerable amount of
control over the activities of the Personal Representative, and requires that
she or he obtain prior permission of the court before certain actions, such
as the sale of real estate or business interests owned by the estate, may
take place.
THE MAIN DUTIES
The main tasks of a Personal Representative are to:
(1) Determine if there are any probate assets;
(2) Identify, gather, and inventory the assets of the deceased;
(3) Receive payments due the estate, including interest, dividends, and
other income (e.g., unpaid salary, vacation pay, and other company
benefits);
5.
(4) Set up a checking account for the estate;
(5) Figure out who is going to get what and how much under the Will (if
there is no Will, the state’s "interstate succession laws" apply. In other
words, in the chain of relatives who is entitled to what.);
(6) Value or appraise the estate’s assets;
(7) Give legal notice to potential creditors (the procedure and deadlines for
creditors to file claims vary from state-to-state);
(8) Investigate the validity of all claims against the estate;
(9) Pay funeral bills, outstanding debts, and valid claims;
(10) Pay the expenses of administrating the estate;
(11) Handle various paperwork, such as discontinuing utilities and charge
cards, and notifying Social Security, Civil Service, and Veterans
Administration of the death;
(12) File and pay income and estate taxes;
(13) Distribute the remaining property in accordance with the instructions
provided in the deceased’s Will; and
(14) Close probate.
An executor or administrator who is derelict in his or her duty is
personally liable for damages caused in the administration of the estate.
Liability may arise from improperly managing the assets of the estate,
failing to collect claims and moneys due the estate, overpaying claimants,
selling an asset without the authority to do so, or at an inappropriate price,
neglecting to file tax returns on time, distributing property to the wrong
beneficiaries, etc.
This means that the Personal Representative might wind up paying
for the loss out of his or her own pocket.
6.
Typically the person named as the deceased's PR goes to an
attorney experienced in probate matters, who then prepares a "Petition" for
the court and takes it, along with the Will, and files it with the probate court.
The lawyer for the person seeking to have the Will admitted to
probate typically must notify all those who would have legally been entitled
to receive property from the deceased if the deceased died without a Will,
plus all those named in the Will, and give them an opportunity to file an
formal objection to admitting the Will to probate.
Application is made to probate the will. This is about a two-page
document to which the original of the will is attached.
The Court Clerk publishes notice and lets the applicant’s attorney
know when a hearing may be conducted.
A hearing on the probate petition is typically scheduled several weeks
to months after the matter is filed. Depending on the state, and sometimes
who the named beneficiaries are, how long before the death the Will was
signed, whether the Will was prepared by an attorney, who supervised the
"execution" of the Will, and/or whether the Will was executed with certain
affidavits, it may be necessary to bring in the persons who witnessed the
deceased's signature on the Will.
If everything has been done properly, only one court appearance is
normally required, and it is a very brief (5-10 minute) hearing that gets the
Will admitted to probate.
If no objections are received, and everything seems in order, the
court approves the petition, appoints the Personal Representative, orders
that taxes and creditors be paid, and requires the PR to file reports with the
court to assure all the deceased's property is accounted for and distributed
in accordance with the terms and conditions of the Will.
The PR/executor is sworn in and Letters Testamentary are issued.
Important: A letter testamentary is a document that gives the executor
the same legal right to deal with the deceased’s property as the deceased
had before his/her death.
7.
An inventory of the estate is prepared by the PR and filed with the
court. The PR then simply follows the instructions set out in the Will. Unless
there are many, many debts owed, the estate should be distributed in a
very short period of time.
If there are a large number of bills owed, it will take some planning
between the executor and the attorney to preserve estate assets. They
must find ways to raise the cash needed to distribute among heirs, pay
taxes and other costs. This often means that some property must be sold
before probate can be close.
While there is no requirement to use a lawyer, probate is a rather
formalistic procedure. Some heirs attempt to do it themselves. Be very
cautious if you run into a do-it-yourselfer. One minor omission or a missed
deadline can cause everything to come to a grinding halt.
The death of a family member or friend sometimes tends to bring out
the very worst in people. Experience shows that even in close families
there is a tendency to get pugnacious about relatively trivial matters, such
as who gets the hand painted portrait of Buster, the family’s beloved dog.
Such minor matters, or any delays or inconveniences can be
upsetting, pose issues of fairness, and create unfounded suspicion among
family members. The investor must be patient and understanding.
TROUBLE AHEAD?
If someone files an objection to the Will, or comes up with another
Will, what is known as a "Will contest" will begin. While Will contests are
not that rare, and while few people actually win one, they can be
extraordinarily costly and create incredible delays. You can still let the
personal representative know that you are patient and willing to wait until
he/she is able to sell the property.
Most of the challenges to invalidate Wills are by potential heirs or
beneficiaries who got little or nothing. Questions on the validity of a Will
must be filed in probate court within a certain number of days after
receiving notice of the death or petition to admit the Will to probate. This document and accompanying materials are designed to provide authoritative information in regard to the subject matter covered in it. It is for illustration purposes only and presented with the understanding that the author and publisher are not engaged in rendering legal, accounting or other professional opinions. If legal advice or other expert assistance is required, the services of a competent professional should be sought. |
