| TRUSTS | CONSERVATORSHIPS | GLOSSARY |
In this day and age, buying or selling property under normal circumstances can be a daunting task. Add to that the passing of a loved one and it becomes even more challenging when the nuances of a Probate, Trust, or Conservatorship are taken into consideration. Therefore, when looking for a real estate agent to represent you in your transaction, it is important to work with someone that also understands the legal issues involved. See Chart below.
Probate in General
In California, when someone passes away and owns real property at the time of death, the PROBATE CODE establishes certain rules and procedures for the disposition and distribution of the property. In other words, “Probate” is a legal process by which assets of a deceased person (also referred to as the “Decedent”) are collected, valued and distributed to others in accordance with a Will, or when there is no Will, the method set out by statute. Think of Probate as a “title clearing process.” It provides for judicial supervision by the PROBATE COURT (which also handles Trust, Guardianship, and Conservatorship proceedings) to make sure the Decedent’s property is properly accounted for and distributed as intended after all debts and expenses have been paid. Generally, real estate held in Joint Tenancy, Community Property with Right of Survivorship, or a Living Trust, does not go through Probate.
The Role of the Personal Representative
A Personal Representative (“PR”) is an Executor or Administrator appointed by the Court to administer a Decedent’s estate. The Executor (or Executrix) is the person named in a Will to carry out the directions as set forth in the Will. The Administrator (or Administratrix) is the person appointed by the Court to administer the estate of a person who died without a Will. Early in the proceedings, the Court generally issues a document called LETTERS TESTAMENTARY (appointing an Executor) or LETTERS OF ADMINISTRATION (appointing an Administrator) which identifies and gives the PR the authority needed to perform their duties. The PR – who quite often hires an estate attorney and a real estate agent if necessary – has many responsibilities, including gathering Decedent’s assets and paying their debts so that the beneficiaries or heirs of the estate receive the largest inheritance possible.
The Independent Administration of Estates Act (“IAEA”)
THE INDEPENDENT ADMINISTRATION OF ESTATES ACT (“IAEA”) is a series of laws which may allow the PR to administer most aspects of a Decedent’s estate without Court supervision. The authority to administer the estate under the IAEA can be given by the Decedent’s Will or by the Court upon petition by the PR which will be reflected in the “Letters” document described above. It is generally done when Probate is initiated but can be done at any time during the proceedings. An estate cannot be administered under the IAEA if it is prohibited in the Decedent’s Will or if an interested party provides Court-approved good cause why it should not be administered under the IAEA. Also, an objecting interested person with good cause may convince the Court to grant restrictions to the powers of the PR under the IAEA. If the restriction is granted, the “authority” of the Personal Representative becomes “Limited” rather than “Full.”
“Limited Authority” vs. “Full Authority”
Under the IAEA, a PR’s authority may be either “Limited” or “Full.” If the Court only grants “Limited Authority,” the PR generally has the power to do all acts allowed under the rules except the power to sell real property, exchange real property, grant an option to purchase real property, or borrow money with a loan secured by an encumbrance on real property. For each of these, Court supervision is required. On the other hand, “Full Authority” under the IAEA rules generally allows the PR to do each of the foregoing at their discretion unless the PR or estate’s attorney is the principal involved in the transaction or if objections are made to the Notice of Proposed Action.
Notice of Proposed Action
When selling estate real property without the need for Court supervision, the PR is generally required to give a “Notice of Proposed Action” to those persons or entities with an interest that may be affected by the proposed sale. The interested parties may include: (a) each person named in the Will; (b) each known heir entitled by law to property of a Decedent dying without a Will; (c) other interested persons requesting notice, such as creditors or beneficiaries of a Trust; and (d) the Attorney General, if any portion of the property is to go to the State. The format and information to be included, as well as the method of delivery of the notice, is described in the California Probate Code. Thereafter, anyone entitled to receive notice can submit objections as outlined under the applicable rules.
Selling Real Property in Probate
A PR may sell estate real property under a variety of circumstances which may require Court confirmation. For example, it could be necessary to sell the Decedent’s home or other property in order to pay debts, persons named in the Will, a family allowance, expenses of estate administration, or taxes. A sale of the Decedent’s property, which may include a home or land, could also be to the advantage of the estate or might need to be sold to satisfy the terms of the Will. Real estate property in Probate may be sold by private sale, public auction, or a different method that may be specified in the Will of the Decedent. A private sale is when bids or offers are independently solicited. A public auction invites concurrent competitive bidding. If a Probate property is a Trust sale or if the Executor/Administrator of the estate has been granted Full Authority under the IAEA, the sale may not require Court confirmation. If the PR has Full Authority under the IAEA, the PR may elect to list the property for sale. Once an offer is accepted, the estate’s attorney mails out a Notice of Proposed Action (see above) stating the terms of the proposed sale to all the heirs. The heirs then have 15 days to object to the sale. If there is no objection within 15 days, the sale will likely go through without any Court hearing required.
Notice of Sale Requirement Prior to Selling Real Property in Probate
Except for sales that are exempt from this requirement (such as sales by a PR with Full Authority under the IAEA which may be sold with or without notice), a “Notice of Sale” must be published prior to the sale of a Decedent’s real property. The purpose of the Notice of Sale is to provide the public with required information concerning the sale and will typically be handled by the attorney for the estate. The contents of the Notice of Sale, method of publication required, number of times that the Notice of Sale must be published, and the period of time within which the publication must occur, can all be found in the Probate Code.
Price and Other Restrictions on Selling Real Property in Probate
When real property is subject to Court confirmation, it must be at least 90% of its appraised value set within one year prior to the sale. In addition, all terms of the sale, including the minimum required deposit, are generally subject to Court approval. Furthermore, offers with contingencies of any sort, such as financing, sale of home, etc., are rare and usually not approved by the Court unless it can be shown that the property cannot be sold without the contingency. A PR may also consider accepting an offer with a contingency provided that the prospective purchaser removes the contingency before the offer is submitted to the Court for final confirmation. In contrast, sales of real property in Probate by a PR with Full Authority under the IAEA do not have the same restrictions and may contain all of the same contingencies and provisions as non-Probate sales of real property.
Disclosures and the Sale of Probate Real Property
Residential real property sold through Probate is generally not subject to the same disclosure requirements that apply to non-Probate sales of comparable real property. For example, pursuant to the current “Sales Disclosure Chart,” provided by the CALIFORNIA ASSOCIATION OF REALTORS® (“CAR”), a few of the disclosures sellers are exempt from making include: (a) Airport in Vicinity; (b) Carbon Monoxide Detector Disclosure; (c) Energy Use Report; (d) Home Energy Rating System (“HERS”) Booklet; (e) Homeowner’s Guide to Earthquake Safety (Booklet and Form); (f) Industrial Use Zone Location; (g) Mello-Roos; (h) Natural Hazard Disclosure Statement (“NHDS”); (i) Private Transfer Fee; (j) Smoke Detector Written Statement of Compliance; and (k) Transfer Disclosure Statement (“TDS”). Of course, there are also certain disclosure requirements that must be made as in any non-Probate sale of residential real property. For example, certain agency disclosure requirements must be satisfied and sellers are not relieved from disclosing any known material facts regarding the value or desirability of the property.
Submitting an Offer for Real Property in Probate
Offers may be submitted at any time before the sale closes and should be made in writing (CAR provides a “Probate Purchase Agreement and Joint Escrow Instructions” form as a model). Among other things, the contract should indicate that: (a) title to be conveyed is whatever the estate holds; (b) sale is subject to court confirmation; and (c) property is sold “as is” to the extent applicable. The offer should be submitted to the PR by the listing agent and/or anyone else listed in the Notice of Sale who is an appropriate recipient, such as the estate attorney. While the PR has the power to accept an offer, acceptance may be subject to Court confirmation unless the sale is made under the IAEA by a PR having Full Authority to administer the sale.
Overbid Process for Real Property in Probate Court
Unless a sale is under Full Authority pursuant to the IAEA, another purchaser may appear at the confirmation hearing and submit a higher written offer to the Court which is referred to as an “overbid.” As set forth in the Probate Code, the overbid must exceed the original bid subject to the following formula: (a) the amount of the original bid, plus; (b) at least 10% of the first $10,000 of the original bid; plus (c) at least 5% of the amount of the original bid in excess of $10,000. So, if the original bid returned to the Court for confirmation is $500,000, then the initial minimum overbid must be for at least $525,500 (10% of the first $10,000 = $1,000; plus 5% of the remaining balance of that bid of $490,000 = $24,500; so $500,000 + $1,000 + $24,500 = $525,500). The minimum amount of increase required after the first overbid will then be set by the Court at the time of the confirmation hearing and the Court will accept bids much in the same manner as an auction until the highest bid available has been made at the hearing. In addition, the “winning” overbid party must appear at the hearing with cash or a cashier’s check (no personal checks) in an amount totaling at least 10% of the minimum overbid price in order to successfully overbid. In the example stated above, that would be $52,550.
Court Confirmation of the Sale of Decedent’s Real Property
When applicable, the Probate Code may require that the PR report the sale of the Decedent’s real property and petition the Court for confirmation of the sale within 30 days of accepting an offer. In the event that the PR fails to perform these acts within the allotted time period, the purchaser of the real property at issue may do so on his or her own behalf. In any event, all real property sales of the estate must be confirmed by the Court except for sales of property by a PR with Full Authority under the IAEA. As noted above, at the confirmation hearing, different outcomes are possible. For example, if there is only an original bid, it may be accepted by the Court if it satisfies the statutory requirements. However, it is also possible that the original sale may be subject to being “overbid” by another purchaser or even multiple purchasers. Under those circumstances, the Court will either confirm the sale to the original bidder or to an overbidder and normally approve payment of the brokerage commissions. Moreover, title will pass to the successful buyer only after the terms of sale have been met, the Court has confirmed the sale and the PR has executed a conveyance to that buyer.
For additional information concerning Probate, Trusts and Conservatorships, you can also visit the CALIFORNIA COURTS JUDICIAL BRANCH website, the LOS ANGELES SUPERIOR COURT PROBATE website, the CALIFORNIA LEGISLATIVE INFORMATION website (for the Probate Code) and our GLOSSARY.*
*Please note that the foregoing is for informational purposes only and does not constitute legal advice. For legal advice concerning any and all aspects of Probate, the IAEA, Trusts or Conservatorships, you should contact your attorney.