Selling a House – Probate VS Trust
A few years ago, I received a call from a family that had been referred to me by one of my existing clients. Their father had recently passed away, leaving behind a Will that divided his estate equally among his six children. Unfortunately, life had already complicated that plan before he ever passed away because one of those six children had died several years earlier. Under the terms of the Will, that deceased child’s one-sixth share was now passing down to her own three children. What had started as a fairly ordinary estate with six beneficiaries had quietly become an estate involving eight
beneficiaries spread across multiple households and multiple generations.
The family had already found a buyer for the house, and the executor believed they were almost finished. Then the real estate attorney handling the closing called with news that nobody wanted to hear. The buyer’s mortgage company was insisting that every beneficiary with an interest in the property sign portions of the closing paperwork, despite the fact that the executor believed he had authority under the Will to handle the transaction himself.
Suddenly, it was no longer a matter of coordinating signatures from five surviving children and the executor. They also needed signatures from the three grandchildren who inherited their mother’s share of the estate, including a seventeen-year-old minor whose interest required involvement by his now-remarried mother acting as his guardian for purposes of the transaction.
What had seemed like a simple real estate sale suddenly became an exercise in coordinating eight beneficiaries, multiple households, different schedules, and multiple legal interests, all while trying to keep a buyer and a mortgage company happy enough to continue moving toward closing. The family had expected arguments over the sales price or who got grandmother’s china cabinet. They never expected that simply figuring out who had to sign the paperwork would become one of the biggest obstacles in getting the house sold.
For many families, the sale of the family home becomes the moment when they discover whether they had an estate plan or merely a collection of estate planning documents. During life, ownership structures, beneficiary designations, and account registrations often sit quietly in the background without creating any obvious problems.
After death, however, the family home frequently becomes the asset that forces everyone to discover exactly who has authority to act, who has authority to approve decisions, and who has authority to sign the paperwork necessary to move forward.
In many cases, none of the children actually wants to keep the house. Sometimes they already own homes of their own and have no interest in becoming landlords. Sometimes they live in another state and cannot realistically manage the property from hundreds of miles away. Frequently, there is still a mortgage on the property, and none of the beneficiaries have the financial ability or desire to refinance the debt into their own names. Whatever the reason, the family often arrives at the same conclusion relatively quickly. The house needs to be sold so that the proceeds can eventually be divided among the beneficiaries.
The Obstacles
Most people assume that the difficult part of selling inherited real estate is the probate court process. Certainly, probate can create delays and additional paperwork, but the practical reality is often very different. In many transactions, the biggest obstacle is not the courthouse at all. The biggest obstacle is the buyer’s mortgage company.
The buyer wants your house. You want the buyer’s money. Unfortunately, the buyer does not actually bring the money to the closing table. The buyer’s mortgage company brings the money to the closing table, and mortgage companies tend to be extraordinarily conservative when it comes to questions of authority, ownership, and signatures. If the lender is uncomfortable with who has the right to sell the property or whether everyone who might have an interest in the property has approved the transaction, the lender can slow down the closing or refuse to proceed entirely until those concerns are resolved.
There are also several issues that have to be addressed regardless of whether the property passes under the terms of a Will or through a revocable living trust. If there is an existing mortgage, a home equity line of credit, a judgment lien, a tax lien, or any other claim secured against the property, those obligations have to be addressed before a clear title can pass to a buyer. In some situations, the debt is paid off from the sale proceeds at closing. In other situations, a beneficiary may decide they wish to retain the property and refinance the debt into their own name. Either way, death does not eliminate the obligations attached to the property.
Repairs Needed to Sell
Repairs and improvements create another challenge that exists regardless of the planning method involved. Very few inherited homes are immediately ready for sale at maximum value. The roof may need attention. The carpeting may need replacement. Paint may need refreshing. Deferred maintenance may have accumulated during the final years of the owner’s life. Families are then forced to answer a very practical question that nobody was discussing at the funeral: who is going to pay for all of this work before the house sells?
When the house is being administered through probate, that answer is often uncomfortable. The beneficiaries may need to contribute money personally and wait for reimbursement later from the sale proceeds. Sometimes one beneficiary advances the money while the others promise repayment at closing. Sometimes the family attempts to divide the costs proportionately among all beneficiaries. Those arrangements work wonderfully when everyone has similar financial resources and similar opinions about what work should be done. Unfortunately, families do not always operate under ideal circumstances.
Even when everyone agrees that repairs are necessary, additional complications can arise because those expenditures often need to be justified during the probate administration process. One beneficiary may believe replacing the roof was necessary to complete the sale, while another believes patching the leak would have been sufficient. One beneficiary may believe updating the kitchen added value, while another views the expenditure as wasting part of their inheritance. What began as a discussion about maximizing the sales price can quickly become a disagreement about whether the executor spent money appropriately.
Using Trust Assets to Prepare a Home for Sale
A properly funded revocable living trust frequently handles these situations much more smoothly because trust assets can often be used directly to prepare the property for sale. Rather than asking beneficiaries to reach into their own pockets and wait for reimbursement months later, the successor trustee can frequently authorize expenditures directly from trust accounts to protect or improve the value of trust property. The repairs are completed, the property is listed, and the trust is reimbursed from the sale proceeds before distributions are ultimately made to beneficiaries.
Who Has the Authority to Sell a House After Death?
The most significant difference between probate administration and trust administration, however, involves authority over the sale itself. When a house passes through probate under the terms of a Will, the probate process largely determines who can negotiate the transaction, who can approve the terms of the sale, and who must sign the closing documents. Even in North Carolina, where a properly drafted Will can specifically grant the executor authority to sell real estate, the practical reality often differs from what the statute books suggest.
Mortgage companies involved in financing the buyer frequently insist that all beneficiaries sign portions of the sales documentation, even when the executor technically possesses authority to act independently. From the lender’s perspective, obtaining additional signatures reduces risk and minimizes the possibility of later title disputes. From the family’s perspective, however, that requirement can create substantial practical problems.
One beneficiary may live in another state. Another may be serving overseas in the military. Another may simply be difficult to reach. The process becomes even more complicated when one beneficiary opposes selling the property but simultaneously has no interest in purchasing the interests of the other beneficiaries. The result can be months of delay while taxes, insurance, utilities, maintenance costs, and mortgage payments continue consuming value that would otherwise eventually pass to the beneficiaries.
The process looks very different when the house has been properly transferred into a revocable living trust during the owner’s lifetime. Instead of probate law controlling the transaction, the trust agreement controls the transaction. Instead of uncertainty about who has the authority to act, the trust document already identifies the successor trustee who possesses that authority. The successor trustee hires the realtor, negotiates the listing agreement, approves repairs, accepts offers, signs contracts, signs closing documents, and receives the proceeds on behalf of the trust. The beneficiaries still receive the economic benefit of the sale, but they do not need to participate in every negotiation, every approval, and every signature required to move the transaction from listing to closing.
This does not mean beneficiaries lose their protections. Trustees remain fiduciaries who are legally obligated to act in the best interests of the trust beneficiaries and to follow the instructions contained in the trust document itself. What it does mean is that one unhappy beneficiary is generally unable to bring the entire transaction to a standstill simply because they disagree with the timing or terms of the sale.
Leaving the House to One Child
Of course, not every family intends for the house to be sold after death. Some parents want a particular child to receive the home while other beneficiaries receive different assets to balance the inheritance. Others want one beneficiary to have the opportunity to keep the home if they are willing and able to assume responsibility for any debt secured against the property. A properly drafted revocable living trust can address those issues directly. The trust can specify whether the beneficiary receives the property free and clear of mortgages and liens or whether the beneficiary receives the property subject to the obligation of refinancing or assuming those debts. Instead of forcing children to negotiate those questions during one of the most stressful periods of their lives, the answers have already been provided by the person who owned the property in the first place.
Control Your Estate Instead of Letting Probate Decide
Ultimately, the greatest advantage of a properly funded revocable living trust is not merely avoiding probate. The greatest advantage is control. Probate applies the rules established by the legislature and interpreted by the courts. A trust applies the rules established by the person who created the trust. When the family home represents several hundred thousand dollars in value (or more) and several beneficiaries all have their own opinions about what should happen next, that difference in control by the Trustee can make all the difference in the world.