The Strange Case of Real Estate and Probate

Andrew Brower

One of the biggest talking points in estate planning and estate administration conferences is what assets do and do not pass via probate.  To answer the basic question of what probate is, which is a topic in and of itself, probate is the court-supervised procedure by which assets pass from a decedent to devisee in the case of testate decedents (those who die with a Will) or from decedent to intestate heirs in the case of intestate decedents (those who die without a Will).   The probate procedure in North Carolina, also sometimes referred to as estate administration, is outlined in Chapter 28A of the North Carolina Statutes.   Assets in probate can pass either via Will (ideally) or by Intestate Succession, the statutory default for how property passes.  Administering a person’s gross estate which includes all property passing by reason of death, via probate or otherwise, is, however, a much broader affair than that of probate. 

In short, assets which pass via probate are any assets which do not pass by any other legal mechanism or operation of law.  So, what could these mechanisms be?  First, I always tell clients, as my Wills and Trusts professor often put it, a contract always trumps a Will (and the Intestate Succession statute).  A very simple example would be with life insurance.  An owner of a life insurance policy has a contract with the life insurance company to pay the death benefit of the policy upon the death of the insured to the beneficiary of the policy.  If the insured’s Will leaves all property to Bobby but the beneficiary of the life insurance policy is Susy, the life insurance company does not care that the insured’s Will leaves his or her property to Bobby as they have a contract to pay the life insurance proceeds to Susy.  The life insurance company will pay the benefit to Susy upon her completing a claim form and submitting the death certificate and other requested documentation.  This process is outside the realm of probate.    A similar scenario can occur with retirement accounts, investments, stocks, annuities and even basic checking and savings accounts if the owner of such account enters a contract permitting the financial institution to pay or transfer the asset to a beneficiary upon the account owner’s death.  This is often required on retirement accounts and is an option with essentially any other type of liquid asset in the form of designations often referred to as transferrable on death “TOD” in the case of securities or payable on death “POD” in the case of checking and savings accounts. 

Another way an asset can bypass probate is when the asset is not owned by the decedent on their date of death.  This could occur if the decedent transferred an asset to a living trust prior to death, or, if the decedent owns an asset with another person who survives them and, therefore, becomes the owner of such account or asset via rights of survivorship.  Rights of survivorship occur instantly and, therefore, a decedent can never own an asset which has rights of survivorship.  There are additional ways property may bypass probate, but these are a few of the most common.

So, why does one need a Will, if virtually all assets can be established to bypass probate and, therefore, a Will?  You need a Will for many important reasons.  First, there are typically always some assets which will pass via probate, especially for a single person or widow, such as a refund check or vehicle.  Second, a Will is a back-up plan or safety net in cases of unknown or forgotten assets or in cases where an account’s beneficiary or joint owner with rights of survivorship has predeceased.  Third, there are certain types of beneficiaries who you would not want to name as a beneficiary or joint owner of an account such as a minor child.  There are many other reasons to have a Will, but these are a few of the most important. 

With respect to a small refund check or a vehicle passing through probate, luckily this is not a huge ordeal due to some of the expedited probate procedures under Chapter 28A.  Most notably is the small estate, sometimes called collection by affidavit, process available in N.C., which allows a short form probate process when a decedent owns no real estate and less than $20,000 in personal property passing via probate. 

But what about when a person dies with very limited, or without any, assets passing via probate other than their personal residence?  This is quite a common scenario.  And here we come to the strange case of real estate and probate.  So, the first question is, whether real estate is a probate asset?  In general, yes.  In many cases for single persons and widows, real estate is in their name on their date of death.  You should note, however, for married couples, jointly owned real estate typically does not pass via probate as it has built in rights of survivorship.   

The strange case with real estate and probate is that, although, in many cases real estate is technically a probate asset, it is never owned by the estate as is the case with other probate assets.  N.C.G.S. § 28A-15-2(b) provides that title to real property of a decedent is vested in the decedent’s heirs or devisees as of the time of the decedent’s death.  In contrast, subsection (a) of the same provides that title to personal property vests in the estate once a personal representative is qualified.  However, N.C.G.S. § 28A-15-1 (Assets of the estate generally) provides that all real property of a decedent shall be available for the discharge of debts and other claims against the estate provided that before real estate is selected the personal representative must determine that such a selection is in the best interest of the administration of the estate.  This is different, but similar to, N.C.G.S. § 28A-15-10 (Assets of decedent’s estate for a limited purpose) which provides that certain non-probate assets may be acquired by the personal representative solely for the purposes of and when need to satisfy claims against the estate.   

In essence, real estate is subject to probate creditors but not a probate asset per se, unless specifically Willed to the personal representative of the estate.  Real estate never becomes owned by the estate (although it must be inventoried) unless the personal representative petitions the court for title and shows it is needed to pay debts or claims against the estate.  In fact, heirs or devisees can sell real estate of a decedent as soon as the first publication or posting of the general notice to creditors so long as the personal representative joins in the sale and takes on liability for any estate claims.  This can sometimes occur within 30 days of the date of death.  

All nuances aside, there are estate planning tools which can be employed to ensure that your real estate is not subject to probate at all and is 100% immune from the claims of estate creditors.  Various types of conveyances made during your lifetime which make use of a life estate or rights of survivorship, depending on the situation, can effectively avoid probate outright and allow your heirs to sell your home, theoretically, the day after your date of death. 

If interested in learning more about estate planning for real estate, call any one of our offices. 

Estate Planning & AdminReal EstateUncategorized