Private Client Services Update – Issues with Real Estate in a Decedent’s Estate

    By Edward R. Stolle, Estate, Trust & Wealth Transfer

    The sale of real estate under Virginia law in connection with a decedent’s estate can involve a number of legal and practical considerations that can be affected by whether a decedent dies with or without a will.

    The Intestate Estate

    If the decedent dies intestate (without a will), title to his or her real property passes immediately upon death directly to his heirs at law. In such cases, the real property is not an asset of the estate. The filing of a list of heirs will establish a chain of title to the heirs as co-owners (tenants in common) based on their respective interests determined under the course of descent provided in Va. Code § 64.1-1.

    Although an administrator of an intestate’s estate has the power under the law to sell and distribute the decedent’s tangible and intangible personal property, they do not have authority to sell the decedent’s real estate, even if the personal property is insufficient to pay estate debts and estate administration expenses. Although the heirs at law do not become personally liable on a mortgage secured by the property, as a practical matter they will need to make arrangements for such payments or risk foreclosure; and prompt arrangements should be made for payment of real estate taxes, insurance and utility payments for the property.

    To sell the real property, the heirs at law as co-owners must all agree upon all the typical questions in the sale of property: whether to sell the property, the timing and manner of sale (by realtor or by owners), the purchase price and other terms of sale; and they must all sign the deed conveying the property to the purchaser. This can present problems if the co-owners cannot agree on these matters and can present practical issues if some of the owners live in other states or other countries. The sale can be further complicated if any of the heirs at law are minors or incapacitated.

    The Testate Estate

    Decedents who die testate (with a will) may provide direction in their will regarding the sale or disposition of their real property. Most well-drafted wills contain provisions granting power of sale of real property to the executor named in the will. This authority is commonly incorporated by specific reference in the will to the statutory powers contained in Va. Code § 64.1-157. This express power of sale allows the executor to sell the real estate if the personal property is insufficient to pay the estate debts and estate administration expenses or because of other estate or beneficiary circumstances.

    There may be some question as to whether an executor should or can sell real estate of the estate if it is not necessary based on the circumstances of the estate, particularly if the beneficiaries of the real estate under the will prefer to receive the real estate in kind. If a person (testator) preparing a will believes that it would be best for the executor to sell real estate, he can provide in his will that the executor is directed to sell the real property, or even more effectively provide that the real estate is devised to the executor to be sold, with the proceeds to be received as an estate asset for distribution to the beneficiaries.

    In the event of sale of the real property by the executor under the terms of a will, the executor typically has authority to determine the arrangements and terms for sale of the property. The net proceeds from the sale of the real property will be disbursed by the executor in accordance with the terms of the will. Pending the sale of the real property, the executor normally pays any mortgage payments, insurance and real estate taxes from the estate assets, unless that is not possible based on the circumstances of the estate.

    Under Virginia law, even when a decedent leaves a will with the power of sale over real estate, title to the real estate nevertheless passes upon the decedent’s death to the beneficiaries of the real estate under the will. Probate of the will establishes the beneficiaries’ chain of title to the property. These rights will be divested if the executor sells the real estate in accordance with the terms of the will.

    It is possible that a will does not contain authority for the executor to sell real estate due to oversight or perhaps the testator did not intend to grant power of sale to the executor and intended that title to the real estate pass directly to the beneficiaries under the will. In such cases, the beneficiaries will encounter many of the same issues mentioned above for heirs at law of intestate estates.

    Some Practical Considerations

    In cases where there is no power of sale available to an administrator or executor and if sale of the decedent’s real estate is necessary or advantageous based on the circumstances of the estate or the beneficiaries, the administrator or executor can, pursuant to Va. Code § 64.1-57.1, petition the Circuit Court for an order granting power of sale to the executor or administrator.

    Also, where an administrator or executor does not have the power of sale, and if all of the heirs at law or beneficiaries of the real estate are competent adults and can agree, they can appoint an agent by special powers of attorney with authority to market and sell the real property upon agreeable terms. The appointed agent could be the administrator, executor or another person(s). This approach would avoid the expense of a court petition.

    When preparing estate planning documents, a testator who clearly wants his executor to sell the real estate can provide in his will that the real estate is devised to the executor to be sold, with the net proceeds of such sale to be disposed of as directed in the will.

    A decedent’s real property is by law subject to the payment of creditor claims against the decedent. Personal property is the primary fund for the payment of creditor claims unless otherwise stated in a testator’s will. If the personal property is not sufficient to pay such claims, an executor with power of sale under a will can and should sell the real property and use the net proceeds to first pay such claims. If title to the real property passes to the heirs at law or beneficiaries under a will (with no power of sale), the creditors may, under Virginia law, file a creditor’s suit to subject the real estate to the payment of such claims, if such claims are not resolved between the heirs or beneficiaries.

    Real estate sold within one year after a decedent owner’s death is not a valid conveyance against creditors of the decedent. Therefore, the purchaser or the purchaser’s title company will typically insist that the net proceeds of sale be held pursuant to an indemnity and escrow agreement for one year after the decedent’s death, or that the sellers purchase a decedent’s debt bond to protect against such creditor claims.

    The Last Resort – Partition Suit

    If title to real estate passes directly to a decedent’s heirs at law or beneficiaries under a will without a sale by the administrator or executor and the co-owners cannot agree regarding a sale of the real estate, what happens then? This situation can often be further complicated if one of the heirs or beneficiaries is living at the property, is not paying rent, is not maintaining the property and refuses to leave the property.

    In such cases, any of the co-owners may file a partition suit in the Circuit Court for the jurisdiction where the property is located requesting an order for sale of the property and also file an action for eviction of the heir or beneficiary living at the property. In the partition suit, one or more co-owners may request approval for purchasing the interests of the other parties. If no such purchase is requested or approved, and if the property cannot be physically partitioned between the parties, the court will enter an order providing for the sale of the property by a special commissioner appointed by the court, with the net proceeds of sale to be distributed to the co-owners according to their respective interests in the property.

    Ed Stolle is a partner at Kaufman & Canoles, in the Virginia Beach office. He is a Commissioner of Accounts for the Virginia Beach Circuit Court and is current Chairman of the Virginia Judicial Council, Standing Committee on Commissioners of Accounts. Ed’s practice focuses on estate and trust administration and planning, business formation and transactions, and commercial real estate transactions.

    The contents of this publication are intended for general information only and should not be construed as legal advice or a legal opinion on specific facts and circumstances. Copyright 2024.