Real estate often causes confusion for personal representatives. In most cases, real estate is not an estate asset. Title to real estate vests automatically in the deceased person’s heirs at the time of death. If the decedent left a Will, title becomes vested in the beneficiaries when the Will is probated and relates back to the time of death.
There are two instances in which real estate can become an asset of the estate. The first is when a Will leaves the real estate to the executor and directs the executor to sell the real estate. The second scenario is when there are insufficient assets to pay the creditors of the estate and the real estate must be brought into the estate and sold to pay creditors.
It is important that the personal representative and the beneficiaries who inherit real estate understand that because real estate is not an estate asset, rent payments are also not estate assets and expenses related to real estate, including utilities, taxes, mortgage payments, and maintenance are not estate expenses. This means that those expenses may not be paid from estate funds.
In many cases, one of the persons inheriting real estate is also the personal representative. This creates a potential for the personal representative to make incorrect disbursements and breach his or her fiduciary duties to the other beneficiaries or the creditors of the estate. It can also create a problem when beneficiaries inherit real estate that is encumbered by a mortgage, and do not have the ability to make the mortgage payments.
When there is cash in the estate, the beneficiaries often wish to use these funds to make payments on the real estate. However, this is not an appropriate use of estate funds. And until the time period for creditors’ claims has expired, estate assets should not be disbursed to beneficiaries. A personal representative who makes incorrect payments from an estate will be personally liable for these distributions if there are creditors or other beneficiaries who were entitled to those funds. All of these issues can be prevented through proper planning.