Most often, the largest or most significant asset that a Personal Representative of an estate must administer is the real estate their family member or loved one left behind. Generally, a loved one’s home is simply sold and proceeds are distributed in accordance with their Will or statutory succession rules. However, unique circumstances sometimes require additional attention or even permission of the Courts in order to properly and legally transfer a loved one’s residence. Is a family member refusing to move out? Does one of the heirs wish to keep the property? Personal Representatives must take caution to ensure that they uphold their fiduciary duties and preserve the estate’s assets for the rightful beneficiaries.
When is Court or Other Approval Required?
Duly appointed Personal Representatives of an estate do not need prior approval of the Court to sell real estate at a public or private sale unless the Will provides otherwise. Pennsylvania Probate, Estates and Fiduciaries Code §3351. Accordingly, if an individual dies and leaves their estate in equal shares to their three children, the child who is appointed Personal Representative does not need approval of the Court to list the property for sale.
However, when the sibling who is appointed Personal Representative wishes to purchase the property in his or her individual capacity, approval from the Court is required in order to ensure that the Personal Representative’s conflicting interests as individual and Personal Representative do not interfere with his or her siblings’ right to fair market value. Pennsylvania Probate, Estates and Fiduciaries Code §3356. As such, an appraisal will be required to determine the fair market value of the property and the Personal Representative will be required to petition the Court for permission to purchase the property after providing reasonable notice to his or her siblings.
In some circumstances, individuals choose to leave their real estate or their residuary estates to charitable institutions. In the case of charitable bequests, notice must be given to the Pennsylvania Attorney General of the charitable gift. As in most states, the Attorney General is responsible for overseeing the proper use of charitable funds and ensuring that estate fiduciaries are properly carrying out their duties in the best interest of charitable beneficiaries. As such, sale of a property that has been pledged to a charity must be approved by the Attorney General on behalf of the charitable beneficiaries.
Deadlines and Valuation Methods
One of the key responsibilities of a Personal Representative is to ensure timely filing and payment of the Pennsylvania Inheritance Tax. This tax is imposed on the net value of a deceased individual’s estate and must be filed and paid within nine (9) months of the individual’s date of death. While bank accounts may easily be valued based on account balances at the time of death, the value of a residence or other real estate may not be as simple as a quick look on Zillow.com.
Pennsylvania’s Department of Revenue accepts the following valuation methods for real estate for purposes of the Inheritance Tax Return:
If the sale price is used as the property’s taxable value for the Inheritance Tax Return, closing costs such as broker’s commissions, transfer taxes and real estate taxes, may be deducted on the Return, in turn lowering the net taxable value of the property and the estate as a whole. If a sale does not take place until after the fifteen (15) month period, or if the other valuation methods are used, closing costs may not be deducted as estate expenses, potentially causing a higher Inheritance Tax payment by the estate.
Should the Personal Representative choose to keep and transfer the property to themselves or surviving heirs, report the property’s common level ratio value on the Inheritance Tax Return, and later decide to ultimately sell the property at market value, any profit above the assessed value reported on the Inheritance Tax Return may be subject to capital gains tax to the estate.
By delaying a sale or other transfer of the decedent’s real estate, the Personal Representative also risks a loss in the property’s value resulting from potential market changes. For example, John dies on January 1, 2023, and leaves behind a home valued at $400,000. His son, Andy, does not get around to listing the property until July 1, 2024, at which time inflation and rising interest rates cause a dip in the real estate market and the property is now worth $345,000 in its current condition. Andy’s siblings may potentially seek recourse from their brother for failing to carry out his fiduciary duties timely.
Conversely, if the real estate market should soar and John’s property value increases to $500,000, the estate’s Inheritance Tax liability may have potentially increased. Andy and his siblings may need to consider the expense of a retroactive appraisal if they wish to lower the estate’s taxable value. Additionally, failure to timely transfer the property and pay Inheritance Tax may result in further costs to the estate or to family members as the interest on the tax accrues.
Joint Ownership and Mortgages
Another complex issue that often arises with respect to real estate left behind by loved ones is the issue of jointly owned mortgaged property. By means of example – Jane Smith, a widow who remarried after her first husband’s death, owns 123 Main Street jointly with her daughter, Kim. Following her father’s death and prior to the second marriage, Kim helped her mother downsize to a smaller home and co-signed on the mortgage. Jane dies without a Will and her surviving husband, Paul, has resided in the home and assisted with mortgage payments for the past several years. Is Paul entitled to the property? Who is required to continue mortgage payments? Is the entire property value subject to Inheritance Tax?
Several factors will determine how to properly transfer Jane’s property and its taxable value. The titling of the deed will dictate Kim and Paul’s respective interest in the real estate. If Jane and Kim owned 123 Main Street as tenants in common, then one-half (1/2) of the property interest passes to Jane’s estate and the other half remains Kim’s. As a result, only one-half (1/2) of the value of the home will be subject to Inheritance Tax. On the other hand, if the deed to the property reflects Jane and Kim as tenants with rights of survivorship, 123 Main Street passes to Kim by operation of law as the surviving owner.
Pursuant to the Pennsylvania Probate, Estates and Fiduciaries Code, Jane’s estate must be equally split between her surviving spouse and daughter. Pennsylvania Probate, Estates and Fiduciaries Code § 2102. Accordingly, if Jane and Kim held title to the property as tenants in common, Kim is left with a 75% interest in 123 Main Street, and Paul is entitled to 25%. If Jane has a sizeable estate consisting of other assets and Paul wishes to keep the home, Kim may agree to transfer her 75% interest in the property to Paul in exchange for Jane’s other assets in equal value. If no other assets are available, Paul must purchase Kim’s ownership interest.
Jane’s outstanding mortgage balance may potentially be deducted as an expense of the estate as well. Review of the note and mortgage is required to determine whether Kim is obligated to make payments pursuant to the note, or if she is omitted from the note and is a co-signer on the mortgage only. Additionally, Paul may potentially be required to re-finance the outstanding loan into his name if he wishes to keep the property.
A loved one’s home is often the largest investment family members leave behind. Personal Representatives are tasked with determining how to properly and efficiently administer the real estate left behind by family members and have a fiduciary duty to preserve the value of the property for the rightful heirs. It is important to seek advice of counsel when complex issues involving real estate arise after the death of a family member.
For advice on how to handle your family’s unique estate or real estate situation, contact the experienced attorneys at Gross McGinley for assistance.
Attorney Yekaterina “Kathy” Bacenet is an accomplished Estate Planning and Administration attorney serving her clients with the upmost in dedication and professionalism.
The content found in this resource is for informational reference use only and is not considered legal advice. Laws at all levels of government change frequently and the information found here may be or become outdated. It is recommended to consult your attorney for the most up-to-date information regarding current laws and legal matters.