When someone passes away without leaving a will, the estate must go through the probate process to determine heirs, settle outstanding debts, and distribute any remaining assets. The laws on how intestate properties are handled vary by state.
As a landlord, it’s important to make sure estate planning is a part of your financial and legal strategy. It may prevent your heirs from experiencing legal difficulties, and it may also give you peace of mind knowing that your assets will be distributed according to your wishes.
What Is Intestate Property?
Intestate property refers to the property of someone who dies without a valid will. Intestate is sometimes also referred to as intestacy. For example, if someone says “he died in intestacy,” it means the person died without leaving a valid will to determine who receives the estate’s assets.
When someone dies in intestacy, the assets and debts are referred to as an intestate estate. Common assets may include:
- Bank accounts
- Business interests
- Debts and liabilities
- Investment accounts
- Life insurance
- Personal property
- Real estate
- Retirement accounts
When someone dies intestate, the deceased person’s estate goes through intestate succession. This is a process that is used to pay off the estate’s debts and determine its heirs.
Key terms to understand
Here are three common legal terms that will help you understand intestate property:
- Decedent: A deceased person whose estate is being administered in probate proceedings.
- Heir: Someone who is legally entitled to an estate’s assets after someone passes away. Heirs are usually relatives.
- Estate: Everything that was owned by a deceased person. It also includes the decedent’s debts and other legal obligations. The estate is a legal entity that must go through the probate process to determine the heirs, pay off debts, and distribute the assets.
How intestacy occurs
Intestacy occurs when someone dies without a valid will or other legal documents that state who should receive that person’s assets. Intestacy may also occur if a will only covers part of an estate. For an estate to be intestate, the value of the property must be more than the outstanding debts.
How Intestate Succession Works
Intestate succession is when a probate court determines the beneficiaries of an intestate estate. The property is distributed to heirs based on state law, which varies by state.
With intestate succession, a court-appointed administrator will first make a list of the deceased person’s assets and debts. The administrator then uses the estate’s assets to pay off any debts, such as credit card and mortgage debt. A probate court, through its appointed administrator, will then determine the intestate estate’s heirs, who are usually family members.
With intestate succession, the decedent’s surviving spouse may inherit half of the intestate estate if there are other heirs. If there are any surviving children or grandchildren, the administrator may split the remaining assets equally among them.
If there are no children or grandchildren, the surviving spouse may inherit the entire estate. The estate’s grandchildren will inherit the assets if their parents are deceased at the time of intestacy.
The probate court administrator often determines inheritance based on family order. If no spouse, children, or grandchildren survive, next in line is usually parents and siblings. Nieces, nephews, aunts, uncles, and cousins come next.
The intestate succession process doesn’t include unmarried partners or friends of the deceased person. That’s why estate planning with a will is important to make sure your loved ones are taken care of after you pass away.
Intestate Properties and State Laws
Intestate properties are handled differently by each state, which each have their own intestate property laws. In some states, such as Texas, an intestate estate is divided among heirs according to community property law.
With community property law, a married couple jointly owns the assets they acquired during their marriage. If a spouse dies, the survivor inherits the assets. If both spouses die, survivorship, or inheritance, passes to their surviving children.
Some states dictate that an intestate estate must be managed based on where the decedent lived. Others handle it based on where the decedent’s property is located.
Different states also handle “separate property” differently. Separate property is when a spouse owns property that the other spouse does not have a legal claim to. This may involve real estate that someone buys before getting married, for example.
In California, for example, separate property goes to the spouse if there are no other heirs. If there are heirs, the separate property is divided between the spouse and the other heirs.
Because intestacy laws differ by state, you should work with a probate attorney for your estate planning. These legal professionals have expertise in wills and estates and should know the intestate succession laws where you and your property are located.
Identifying Intestate Property
To help you identify intestate property, it’s important to understand what’s included in the decedent’s estate and whether it is probate or non-probate. The estate’s executor also has an important role in identifying intestate property and initiating the probate process.
Understanding the decedent’s estate
When you think of someone’s estate, you may think of real estate. Someone’s home or investment properties may just be a small part of the estate, however. An estate can include anything that someone owns, such as furniture, vehicles, and even virtual assets like domain names, websites, and royalties from creative works.
In addition to assets, someone’s estate may also include its debts and unsettled legal claims. An estate may have unpaid credit cards, mortgages, personal loans, taxes, and other outstanding bills, for example. It may be necessary in some cases to sell property to pay off the debts.
An unsettled legal claim—such as a lawsuit, divorce settlement claim, or challenge to the validity of the will—could delay the probate process. The administrator will have to settle the disputes, which could substantially reduce the remaining assets to be distributed to heirs—or wind up leaving nothing to them.
Probate and non-probate assets
When someone dies, that person’s assets become either probate or non-probate assets. The asset type will determine how the ownership is transferred.
If something is a probate asset, it means it must go through the probate process. A court will oversee its distribution. If there is a will, for example, the court will appoint an estate administrator, who will pay off any outstanding debts and distribute the asset to heirs.
If something is a non-probate asset, it means it will bypass the probate process and go directly to a co-owner or beneficiary. An example of a non-probate asset is a home where someone is designated as having a “right of survivorship” on the deed. When the owner dies, the ownership of the home automatically transfers to the beneficiary and avoids the probate process.
The role of the executor in identifying intestate property
An estate’s executor has an important role in identifying intestate property. When someone dies, the court will appoint an administrator (also known as an executor) to pay off any outstanding debts and distribute the assets to heirs. In the management of the estate, the executor must determine whether there is a will. If there isn’t a will, the property is intestate.
If a property is intestate, the executor will initiate the probate process by first filing a petition with the probate court. The assets will then be identified, secured, and appraised if necessary. All debts, including taxes, will then be paid. Any remaining assets will then be distributed to beneficiaries. The executor will then file a petition with the probate court to close the estate.
As a real estate investor, it’s vitally important to plan your estate so you will know who will receive your assets. You don’t want to leave it up to a court-appointed administrator to decide for you. At the very least, you should have a will. You may also want to consider having “right of survivorship” on the deeds to your properties.
In addition to including all of your long-term assets in your estate planning, like multifamily properties and mobile homes, you should also consider including your short-term investment properties. Although you may have to frequently amend your estate planning documents if using such strategies as fix-and-flip and BRRRR, it may be worth it to make sure your loved ones are taken care of.
Because estate planning can be confusing and complicated, consider hiring an attorney to help you. This is something you don’t want to risk getting wrong by doing it yourself. A professional can make recommendations and take care of the paperwork for you to make sure it’s done correctly.
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Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.