No doubt, people are living longer these days, and that means that more people are living on their social security and pensions in their senior years, having outlived their retirement accounts. If they are lucky, they own their own home which they maintain with their monthly income. However, complications arise when a homeowner dies and the primary (or only) significant asset of the estate is the decedent’s home.
Assets that are owned in a decedent’s own name which do not bear a beneficiary designation or pass-on-death titling would pass under the terms of the decedent’s Will (or would pass by intestacy to the decedent’s heirs at law if the decedent did not have a Will). Either way, some level of estate administration is required. If the decedent’s assets are under $30,000, in general an abbreviated estate proceeding is available to the fiduciary of the estate (termed a “Voluntary Adminstration”). However, under current law real property cannot be transferred under a Voluntary Administration, and therefore even if the property value was under the Voluntary Administration threshold, a probate proceeding would be required to transfer the property.
A probate proceeding requires a petition to the Surrogate’s Court of the county of the decedent’s residence for the estate’s fiduciary to be appointed, and the decedent’s heirs at law are interested parties to the proceeding. It requires that an asset inventory be filed, and that the estate be settled (formally or informally) under the supervision of the Surrogate’s Court no less than seven months from the date the estate fiduciary was appointed (the seven months being the period in which creditors are to file any claims they may have against the estate assets).
The estate fiduciary generally must engage an attorney to assist him or her in the estate proceeding, which is an expense of the estate. However, if the home is the only significant asset of the estate, it may be difficult to secure an arrangement with an attorney whereby the attorney accepts payment for legal services from the eventual sales proceeds of the home.
As if requiring a decedent’s family member to petition for probate in order to transfer title to the home wasn’t punishment enough, consider what is required when the home is in need of significant repair or cleanup before it can be sold. If the property is not specifically identified by Will as passing to someone, the estate fiduciary must try to sell it (unless the heirs agree they wish to keep the home). Painting, cleaning, and repairing the property to prepare it for sale can be expensive. Whether such expenses are proper expenses of the estate is not completely clear: §11-1.1(b)(6) of the Estates, Powers and Trusts Law permits estate fiduciaries to expend amounts of estate assets for “ordinary repairs,” and §11-1.1(b)(22) permits “other reasonable and proper expenses of administration.” A brief review of case law indicates that at best courts are divided on whether, for example, expenses such as repainting the walls and cleaning the carpets of the home of a deceased smoker fall within “ordinary repairs” or “other reasonable and proper expenses of administration.”
If all estate beneficiaries are in agreement as to expenditures to prepare real property for sale, then the concern is less of an issue. However, if one or more estate beneficiaries disagree as to the expenses, they could object upon settlement of the estate. Moreover, assume the decedent had a mortgage on the property, and there’s a question as to whether the market value of the house will cover the balance of the mortgage. If the creditor might receive less than the balance owed, the creditor might object to the estate fiduciary’s payment of cleanup or repair costs. If the estate fiduciary advances his or her own personal funds to pay the expenses, they may not receive reimbursement from the proceeds upon the sale of the property. Therefore, the estate fiduciary’s payment of expenses to prepare the property for sale may put him or her at personal financial risk.
In our view, practicality should guide the estate fiduciary. The estate fiduciary has an obligation to obtain the best possible price for the home, in the interests of the estate’s beneficiaries and creditors. The estate fiduciary should consult a Realtor and ask him or her for advice on what the home’s reasonable listing price would be “as is,” and what it would be after certain reasonable preparation activities, such as painting, cleaning, landscaping, etc. If, in the Realtor’s and estate fiduciary’s judgment, more value would be realized if some reasonable expenses were paid for services to prepare the property, the estate fiduciary should embark on that course of action. It is highly unlikely that an estate fiduciary would be criticized for expenses that resulted in a better net financial result for the estate.
We talked to Rob Reimer, a Realtor at Nothnagle’s office in Greece, New York, to gain his perspective on what types of improvements result in a better net financial result. According to Rob, the most important immediate improvements to prepare a house for sale is to clean up any clutter within and around the home, so that it’s as clean as possible. Fresh paint and adequate flooring are also favorable, as is a tidy yard. Efforts and expenditures spent on those endeavors provide the best return. If the estate fiduciary shops around to get a good price on these services, he or she is likely to receive an increased sales price that will at least cover the expenses incurred. If the estate fiduciary can roll up his or her sleeves and do some of the work (possibly with the help of the estate beneficiaries), the financial result will be better yet. In Rob’s opinion, with respect to homes of modest value, larger improvements such as new kitchens and baths, roofing and siding will rarely result in improved sales prices that offset the costs. Such large improvements on homes of modest value might only realize a return on investment of 25% or perhaps even less.
If you have a client who is of advancing age or declining health, and his or her primary asset is their home, you might discuss these issues and offer a possible solution to avoid the necessity of engaging an attorney for the probate/estate administration processes. The homeowner could place the home in title such that the homeowner retains the home during his or her lifetime (a “life estate”), but at death the property passes directly to one or more individuals as a remainder interest. This avoids the cost of probating a Will, having an estate fiduciary appointed, and having Court supervision over the process. A notable caveat in this strategy is that if the homeowner wants to sell the property after placing it in life estate/remainder interest title, the individuals receiving the remainder interest by the deed will be required signatories to the sale. In addition, the homeowner may have to file a gift tax return for the year of the splitting of the interests, particularly if the value of the remainder interest granted is above the current annual gift tax exclusion of $14,000 per recipient.
Jennifer Weidner is a Partner at Boylan Code LLP, concentrating her practice on estate and trust administration and transfer tax planning. For more information, please contact Jennifer at (585) 232-5300 or email@example.com.