Probate law is a part of business law with an unusual trait: It is also a part of family law.
When it comes to the intergenerational transfer of wealth within families, it is the family home occupied by the parents that is the major asset typically. Often such homes have no mortgage liens. Often, but far from always, elderly decedents have little to no outstanding debt in general.
So, what is the best way to allow the ownership of the home to pass legally to the decedent’s heirs? There is remember an opposing interest to balance the need for efficiency with, the rights of the creditors of the decedent. In theory, all debts should be paid in full first to creditors before any inheritance is received.
There are two basic approaches taken under the 50 state laws and practice on this subject.
One method is to be certain the creditors are paid first before any land transfer can occur. That means probate court for one year or longer with the attendant costs. This is the method employed by Alaska law.
Probate may be invoked only by the family for a period of one year from the decedent’s death, but by creditors also thereafter. The land remains unsellable until probate is over.
If no one files for probate or forecloses through a mortgage, the property remains unsellable indefinitely, forever if a real estate tax delinquency does not build. This commonly happens to dilapidated homes with no large mortgage, especially where the decedent has a number of heirs at law.
The alternate method employed for passing a home from a decedent to their heirs in many States is to allow the proven lawful heirs to sign a sales deed that is recorded in the courthouse along with the death certificate and the decedent’s Will or other needed documents to prove the grantors’ right of ownership by descent.This method seems to though leave creditors of the decedent that are not secured by a home mortgage loan to be left unpaid very often while the heirs only benefit.
While this method of transfer without probate evolved out of common law real estate principles and practices, the general idea has now been largely codified in 25 states with a twist, including Alaska in 2014, called a Transfer Upon Death Deed.
Certain requirements must be met with the primary event being the recording of the deed prior to death or incapacity. In most of these States, including Alaska, such a deed can be revoked by the grantor in a later recording. This method though does not rescue the property where such a deed was never filed by decedent, as is typically the case.
My experience so far in Alaska is that the estates of elderly homeowners seldom have creditors or even one creditor benefit from the protections of probate since there are no significant debts. So, in most cases the probate requirement provides only expense and delay to no real purpose.
I personally have been involved with probating two dilapidated properties recently that could easily have become a public eyesore for decades to come due to a clouded title. That was avoided.
One businessman in Bethel navigated a homeless heir through probate while reconditioning the house into an attractive place. He made a lot of money in the end, after a lot of work, trouble and expense.
Another property in Sitka vacant for years was sold to a neighboring property owner who did not know who to turn to in proposing his purchase.
Either of these two properties could have been transferred under the common law method in many States by the obvious legal heirs just by signing a deed and recording the descent of ownership due to the owner’s passing. Instead, a long complicated legal process applied in Alaska.
Possibly an attractive middle course between these two methods of passing family wealth can be managed. For instance, consider attaching the legal debts of a decedent that are recorded in the courthouse within six months of the decedent’s passing to his or her real property at the time of death, whether still owned by the decedent or not by the time of the recording. Then a real estate title company can deal with these contingencies while keeping commerce in the community flowing.
There are other formulations as well further protecting creditors without the monster of a probate proceeding.
In addition to the 2014 law allowing for Transfer Upon Death Deeds, Alaskans do have options in avoiding the probate court for your heirs after your death. The most popular way is to create beneficial trusts for your heirs thereby passing ownership of your property to the trust you still control. There is also the option of conveying your property directly to your heirs now while retaining a “Life Estate” ownership for yourself. These methods also have their weaknesses and dangers.
Stephen Merrill, Atty.
THE ALASKA BUSINESS BLOG