What happens to LAND when I die?
REAL PROPERTY IN ESTATE SETTLEMENT
When a decedent dies owning real property, that real property passes to either the beneficiaries under a will, or to the heirs of the estate pursuant to the laws of intestacy. As common as this situation may sound, from a legal standpoint, it is not as straightforward and unproblematic as one may think. In fact, there may be a number of complications that arise in dealing with real property in the administration of an estate. Let’s examine some of these complications and how they arise.
In North Carolina, the transfer of title to real property in an estate administration is governed by statute. The statute provides that title to a decedent’s real property vests in the heirs or beneficiaries of the estate upon the decedent’s death. For an example, let us say that the father of a beneficiary passes away owning one hundred percent of his principal residence. In his will, he leaves his entire estate, meaning all property real and personal, to the beneficiary. In this situation, once the will is filed for record (probated) with the Clerk of Court in the jurisdiction where the real property is located, the beneficiary becomes the official owner of the property as indicated by the public records. In this instance, it is not necessary to prepare and record a deed to complete the transfer, as the probate of the will serves to pass title in the real property to the beneficiary.
However, while passing title to the real property is relatively straightforward under North Carolina law, the law also provides that all real property in a decedent’s estate is subject to the estate’s creditors. First and foremost, this means that mortgages and lines of credit “tag along” with the transfer of the house. They are not avoided by the death of the decedent or otherwise extinguished by the probate process. Instead, the underlying debts must be paid or settled in order for the real property to pass free from the subject liens. However, a point that is far less well known is that the other creditors of the estate may potentially seek to bring real property into the estate to be sold for the benefit of the creditors. In North Carolina, there is a statutory process for recovering possession of real property and selling that property upon approval by the Clerk of Court.
When an estate comes into being with significant outstanding debts, inheriting real property such as a house may be a mixed blessing. The executor or administrator will most likely try to sell the house, but sales of homes often do not occur quickly. The delay in that process is even further exaggerated in the current real estate market. Furthermore, while a house is on the market, all regular mortgage payments, together with all taxes, insurance, association dues, and all other expenses connected with the upkeep and maintenance of the house, must continue to be paid as they become due.
These carrying costs may translate into considerable expenditures by the estate. Accordingly, the fiduciary of the estate must then consider how long to continue to list the house, whether it is advisable to lower the selling price, and if so, by how much. Of course, these considerations arise primarily with real property that is significantly encumbered by debt. In certain cases, it may be more advisable to let the property go rather than to continue paying these sometimes considerable costs. In such a case, the amount of the debt owed on the property, along with the current fair market value of the property are key factors to be considered by the fiduciary.
Due to the recent downturn in the housing market, an increasing number of estates are faced with the situation in which the mortgage debt exceeds the house’s current value. Also, in many instances, the continued costs of maintaining the house are greater than the estate’s ability to pay those costs. In either scenario, the only practical course of action may be to allow the property to go into foreclosure. This is a decision that is made only by the executor or administrator after close consultation with the other parties interested in the estate, such as the beneficiaries or heirs of the estate.
If the decision is made to forego payment and cede the property to the mortgage creditor, the executor or administrator should ensure that all personal property has been removed from the house and that there is no reason to return. Expenses associated with property maintenance may then be terminated, as the foreclosure will be allowed to run its course. The eventual result will be a public sale of the property on the courthouse steps. The proceeds of the sale are then used to satisfy the underlying mortgage debt. Since this process can be long and costly for lenders, they may wish to avoid it by allowing the estate the opportunity to tender a “deed in lieu” of foreclosure for the property. This entails executing a deed to the lender, typically (but not always) in satisfaction of the full indebtedness.
Like the estate, the mortgage lender may not wish to incur the significant carrying costs of owning and maintaining the property. Therefore, they may also offer the estate the opportunity to execute a “short sale” of the property. In this scenario, the estate attempts to market the property to third parties for an amount less than the full amount due under the mortgage. The lender will only authorize the sale at a price that is acceptable to the lender. The benefit to such an arrangement is that the sale is in satisfaction of the debt owed, and thus, any liability of the estate or its beneficiaries is extinguished. Interestingly enough, lenders are willing to approve of such sales because they will not have to take title to the real property, they will not have to market the property, and they will not have to pay to maintain the property. Both the “deed in lieu” or the “short sale” options are usually preferable to a foreclosure for the estate, since they expedite matters and potentially allow the estate to avoid any further liability on the debts in question.
The foregoing complications may be largely avoided if the owner of the real property engages in basic estate planning during his or her lifetime. For example, the real property can be held jointly with one’s spouse in an arrangement known as tenants by the entirety. This allows for title to the real property to pass directly to the spouse upon the owner’s death. In such an arrangement, the real property is transferred free from the claims of the estate’s general creditors. Of course, this would not avoid a claim based upon a properly executed and duly recorded mortgage. Alternatively, the property may be conveyed into a trust during the grantor’s lifetime. The trust would then allow the grantor to retain significant control over the property, while also sheltering the property from estate creditors after the death of the grantor.