In Deuteronomy and other places, the Bible talks about the sins of the Father being passed down to future generations. Well, moral issues aside, in real estate it is possible that a father’s financial transgres-+sions can hinder the prosperity of future generations. But did you know that in probate court the financial sins of a son or daughter can impact the inheritance of their brothers or sisters?
PRIOR TO A SALE OF REAL ESTATE, SELLER JUDGMENTS MUST BE PAID
When real estate is sold, part of the job of title company is to check for judgments against the seller. Before a home can be sold, any such judgment must be paid. They can be paid prior to settlement or paid from the proceeds at settlement but they must be paid before the buyer can get clear title and thus title insurance. Why? Judgments against a property owner could become liens against the property even after the sale.
(FYI, for a married couple, in order for the judgments to attach to real estate, if title is held as tenancy by the entirities, both spouses must be on the judgment. See my blog on Tenancy by the Entirety)
Now, when a person dies and there is real estate involved, the title company will check to see if there are any judgments against the deceased AND all heirs and beneficiaries. At the time of death, even though title has not transferred, all heirs have an interest in the property and are technically owners. So any judgments against the heirs could become a lien against the property.
So what does this mean in the real world?
HENRY IS IMPACTED BY HIS SISTER’S FINANCIAL NIGHTMARE
Henry paid all of his debts on time. His sister Elsie was also responsible but due to medical issues and a job loss, she lost her home and has a $100,000 default judgment against her from the lender on her old home.
Henry and Elsie’s Mom passed away 10 years ago and recently their Dad passed leaving a house to both of them. His will directed them to sell the home and split the proceeds. After paying off the Dad’s mortgage, there was $120,000 to be split. It looked like each sibling would get $60,000. But since the $100,000 judgment against Elsie was on record, that needed to be satisfied.
Would Henry need to give up $40,000 of his proceeds to cover Elsie’s shortfall? I am not sure of the legal boundaries here but what I am almost 100% certain of is that Elsie will get zero. If the creditor doesn’t agree to take $60,000 settlement on the $100,000 owed, settlement can not take place. And even if they do agree to take the $60,000, papers will need to be filed and recorded to give the title company the confidence they need to close.
This is why when I get a signed listing on an estate, I always have a title report run so we can see if there are any judgments or other title issues that may jeopardize settlement. Ever once in a while we discover something that delays us putting the house up for sale. The scenario above would be one.
BUT THERE IS A SOLUTION…IF WORKED OUT EARLY ENOUGH
After the homeowner dies, it is too late to do anything but prior to their death there are steps that can be taken. If there was open communication between Dad, Henry and Elsie about Elsie’s financial predicament, Dad could revise his will to create a clear path for the house to be sold. If the will is revised so that Henry is the only heir, Elsie’s judgment is no longer in play. All proceeds will go to Henry. How Henry handles things from there is between Henry, his conscience and his sister but the house can be easily sold.
I actually saw this come into play a few years back where one sibling was cut out of the will. I thought I was going to run into a difficult family situation but it was simply smart estate planning. That sibling had a business that had failed and there was still a tremendous amount of outstanding debt among multiple creditors. That debt would have been a a mess to negotiate even if the creditors only were trying the get debtor’s portion. What percent does creditor A get in comparison to creditor B or C? I was so happy they cut him out so we had a clear path to settlement.!
I am not an attorney so do not take action simply because of this blog. Do talk to an attorney about your situation. Your situation may have twists and turns that require strategies not discussed here. Your state law may be different. The point of this blog is to bring this issue to light. If you know you are a heir along with someone who has judgments against them, talk to an attorney before the homeowner passes.
Okay, that said, my last point…..
IF YOU HAVE INHERITED A HOME, CALL ME – I WORK TO AVOID SURPRISES
You don’t want settlement delays or cancellations when you think you have the house sold. Before we put the property on the market, I will have a title search run at no cost to you to ensure we have no surprises including known judgments against the heirs. There are other things that can crop up in a probate case as well – more mortgages on the property than the heirs thought, unreleased trusts, missing death certificates, etc. If we know these issues in advance, we can usually find a work around. The worst scenario is to get a home under contract, have the title work run and then find out there is an issue. You can’t risk a probate sale with just any Realtor. You need a Realtor experienced in this niche. That person is me.