Real estate, especially residential real estate, is typically the asset that causes most estates to go into probate. However, whether probate is necessary or not, there are three main ways to deal with a house in an estate:
This blog discusses the three options for personal representatives (Arizona’s term for executors) to deal with a real estate asset in an Arizona probate.
First, the personal representative can distribute the real estate asset to a beneficiary of the estate. A will often has a specific bequest of a piece of real estate to one of the beneficiaries. The specific bequest clause states that this real property gets distributed to one of the beneficiaries. When this is the case, the personal representative can distribute the real estate to the beneficiary subject to any mortgage or any other liens on the property. If the will does not have a specific bequest beneficiary, then the personal representative can also distribute the real estate to a beneficiary as part of their residual distribution. For instance, if the will indicates that a particular beneficiary receives $500,000, and the real estate in the estate is valued at $400,000, then the personal representative could distribute the $400,000 real estate asset plus other assets totaling $100,000 to satisfy this specific bequest.
Similarly, if the residue clause in the will indicates that everything is to be distributed equally to three children, then the personal representative could distribute the real estate as part of the equal share distribution to one of the children, presuming that the real estate is worth less than one child’s overall share. For example, if the total value of the estate, after taxes and expenses have been paid, is $1,500,000, and the estate has a $400,000 house and liquid investments worth $1,100,000 to be distributed to the three children, then the personal representative could distribute the house worth $400,000 plus $100,000 in other assets, for a total of $500,000, to one of the beneficiaries as his/her share of the residual estate. However, the key issue, as it almost always is, is the valuation of the real estate being distributed.
Typically, I recommend using an appraiser in these situations, rather than an estimate of value from a real estate professional. However, if everyone agrees to the valuation, the real estate professional’s estimate of value may be sufficient. The other key issue is the date of the valuation. Because market swings can happen in the real estate market, I usually recommend doing an evaluation closer to the date of distribution, rather than the date of death. Finally, as the personal representative, it is always important to remember that, in making any distributions, you have a duty of impartiality to the beneficiaries, so that you need to treat everyone the same, showing no partiality to one beneficiary over the others.
Second, the personal representative can sell the real property to one of the beneficiaries of the estate. Oftentimes, the will contains a right of first refusal clause in it with respect to a family residence or other real estate. If one of the beneficiaries wants to exercise this right, then he or she can make an offer to the personal representative to purchase the real estate directly from the estate for its fair market value. Again, the purchase price under these circumstances should be valued by a qualified real estate appraiser. Without a first refusal that identifies one of the beneficiaries, the only other issue is whether any other beneficiaries might want to purchase the house from the estate at the same price. In order to avoid these types of issues, I recommend that the personal representative send out an e-mail or other written notice to all beneficiaries, attaching the appraisal and giving everyone a period of time – typically 30 days – to object if they have an issue with such sale. After the sale, the net proceeds would then be deposited into the estate account, and the personal representative would make distributions according to the terms of the will. One other variation I have seen with this option is that the beneficiary uses his or her share from the estate to pay for a portion of the purchase price, coming up with the additional amounts for the purchase price out of pocket. Although the calculations are a bit tricky, this works well, but, as the personal representative, I recommend enclosing the proposed transfer in the proposal for distribution at the end of the probate to be sent out to all the beneficiaries.
Finally, the personal representative can always hire a real estate agent and sell the real estate to a third party. Once the personal representative has been appointed by the court, the process of selling the home through a realtor is the same as any other home sale. However, the personal representative has a fiduciary duty to get the best possible sales price for the real estate, given all the facts and circumstances in the case. Once the real estate is sold, the proceeds would then be deposited into the estate account to be used to pay creditors of the estate and then make distributions according to the terms of the will.
As the personal representative of the estate, if you are having difficulty deciding which way to go with these three options, I recommend hiring a qualified Arizona probate attorney to assist you in making this important decision.
For additional reading regarding dealing with real estate in probate cases, please see the following article:
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