ORANGE IS THE NEW BLACK(ACRE): NAVIGATING THE COMPLEXITIES OF THE TRANSFER OF A DECEDENT’S REAL PROPRTY INTERESTS CLE Credit: 1.0 Thursday, June 13, 2019 8:30 – 9:30 a.m. French Galt House Hotel Louisville, Kentucky A NOTE CONCERNING THE PROGRAM MATERIALS The materials included in this Kentucky Bar Association Continuing Legal Education handbook are intended to provide current and accurate information about the subject matter covered. No representation or warranty is made concerning the application of the legal or other principles discussed by the instructors to any specific fact situation, nor is any prediction made concerning how any particular judge or jury will interpret or apply such principles. The proper interpretation or application of the principles discussed is a matter for the considered judgement pf the induvial legal practitioner. The faculty and staff of this Kentucky Bar Association CLE program disclaim liability therefore. Attorneys using these materials, or information otherwise conveyed during the program in dealing with a specific legal matter have a duty to research the original and current sources of authority. Printed by: Evolution Creative Solutions 7107 Shona Drive Cincinnati, Ohio 45237 Kentucky Bar Association TABLE OF CONTENTS The Presenter .................................................................................................................. i Orange is the New Black(acre):Navigating the Complexities of the Transfer of a Decedent’s Real Property Interests ............................................................ 1 Appendix A .................................................................................................................... 17 Appendix B .................................................................................................................... 19 Appendix C ................................................................................................................... 21 Appendix D ................................................................................................................... 23 THE PRESENTER Kelli E. Brown Goldberg Simpson, LLC 9301 Dayflower Prospect, Kentucky 40059 (270) 791-7743 [email protected] KELLI BROWN is a partner with the firm of Goldberg Simpson where she chairs the Trust and Estates Department and practices in the areas of estate planning, probate, trust administration, and estate litigation. Ms. Brown received a B.A. from the University of Dayton, a J.D. from Northern Kentucky Salmon P. Chase College of Law, and an LL.M. in Estate Tax from the University of Miami. She is licensed in Ohio, Tennessee, and Kentucky as well as Federal Tax Court. She serves on the KBA Probate and Trust Legislative Committee and is a three time former Chair of the KBA Probate & Trust Law Section. Ms. Brown is a fellow with the American College of Trusts and Estates Counsel (ACTEC). She is the ACTEC State Chair-Elect beginning in 2019. She is a frequent speaker on all topics associated with estate planning and has many publications on all topics realted to estate planning and estate administration. Ms. Brown is a Justice Thomas B. Spain Award Winner. In 2017 Ms. Brown published Estate Planning When You Have An Addicted Child. i ii ORANGE IS THE NEW BLACK(ACRE): NAVIGATING THE COMPLEXITIES OF THE TRANSFER OF A DECEDENT’S REAL PROPERTY INTERESTS Kelli E. Brown, J.D., LL.M. I. INTRODUCTION When a Kentucky decedent dies owning real property, ownership of that real property generally passes by one of these methods: (1) by operation of law; (2) by the terms of a last will and testament or by trust; or (3) by the laws of intestate succession. The fact that there is not one defined way can be a very difficult concept for anyone, including attorneys. What is often most confusing is that although title passes because of the death of the decedent, real property is not necessarily subject to “probate” and probate administration. When and whether real property interests are subject to probate presents real challenges for the Kentucky lawyer who may struggle in a particular situation with some of the following issues: A. When can/should/how a fiduciary sell real property in a probate estate? B. What are the rights of creditors in probate estates where real property was the primary asset of the decedent? C. What are the rights of the beneficiaries to object to a sale by a fiduciary? D. How are the real property bills (taxes, mortgage, gas, electric, water) paid during the probate estate? E. What steps is a fiduciary obligated to take to protect title to the real estate? F. What are the obligations for real property subject to a mortgage? G. How should property pass if an heir/beneficiary has creditor/debt issues? H. Can real property passing by operation of law (i.e. survivorship) stand “good” for the debts of the decedent? This article primarily focuses on real property that does not pass by operation of law (example, real property passing by virtue of joint tenants with rights of survivorship where there is a survivor), although it will touch on those issues. Instead, it will walk you through the basics of real property issues that a Kentucky attorney may encounter when a decedent’s interest in Kentucky real property passes by the laws of intestacy, by last will and testament, and/or by trust, and will attempt to answer the above questions. 1 II. PROBATE AND KENTUCKY REAL PROPERTY: IN GENERAL A. General Rule of Real Property Interests in Kentucky When a person dies owning real property in Kentucky, his or her interests pass in accordance with Kentucky law. As stated above, at the death of a real property owner, such real property can pass by one of these methods: by operation of law; by the terms of a last will and testament or trust; or by the laws of intestate succession, if there is not a valid will. When real property passes by intestate succession or by a last will, then the successor to the decedent's interest in the real property is not the decedent's estate, but rather the decedent's heirs or beneficiaries under a Last Will and Testament.1 Stated differently, real property vests in the heirs or beneficiaries at the moment of death. This is a challenging concept to grasp for both attorneys and their clients. Even more difficult is that although real property vests immediately, Kentucky case law and statutes give a fiduciary certain rights for the transfer and sale of real property under some situations such as the payment of debt or a mandated distribution. The general rule is that real estate passes outside of probate, except when it does not. The author of this article wants to establish first and foremost that virtually every issue concerning the passing of Kentucky real property upon death will come back to this general rule. And, while we agree that this is rule is (1) confusing and (2) difficult to explain in terms of title and counseling those impacted by real estate passing as a result of the death of a person owning property in Kentucky, it is what it is, so to speak. B. The Petition for Probate: Real Estate Inclusion Issue If the general rule is that real estate vests at the moment of death unless it does not,2 then at the inception of the probate the issue becomes whether there is an obligation by legal counsel to include real property interests of a decedent on the petition for probate. The recommendation of the author is that the real property interests in which the decedent had an interest should be listed on the petition, even if the inclusion is for informational purposes and denoted as such. The rationale behind this is that our law allows for the use of real property interests to be pulled into an estate under some circumstances. For example, KRS 395.515 states in relevant part:3 ...that if it shall appear that the personal estate is insufficient for the payment of all debts, the court may order the real 1 Slone v. Casey, 194 S.W.3d 336 (Ky. App. 2006); Wood v. Wingfield, 816 S.W.2d 899 (Ky. 1991). 2 Id. 3 KRS 395.515. 2 property descended or devised to the heirs or devisees who may be parties to the action, or so much thereof as shall be necessary, to be sold for the payment of the residue of such debts. Petitions to open a probate are public documents and undoubtedly creditors have certain rights. The disclosure of the real property interests of a decedent can only mean that the probate attorney has provided any person or entity who is examining the decedent’s assets with information to determine that person or entity’s rights in proceeding forward. Basically, it means full disclosure. Further, including real property interests of a decedent within the petition can potentially assist with title issues. Specifically, when the six-month creditor period4 has passed, then the title can reflect that unsecured creditors are known. Essentially, the disclosure of a decedent’s real property interests can strengthen the argument of a fiduciary that full disclosure was made to all potential creditors and can establish that unsecured creditors are known and made aware of the real situation. C. Dispensing with Administration and Real Estate Since real estate vests at the moment of death,5 in theory, if a decedent dies with real property but without other assets subject to probate (or probate assets less than $15,000), then there may be a determination to dispense with administration under KRS 395.455. Yet, if a dispense with administration occurs, it does not necessarily mean that the decedent’s creditors do not have rights. To the contrary, KRS 396.205 provides that a creditor has two years from a decedent’s death to come forward if a full administration is not opened.6 This opens up a very real concern about dispensing with the administration of an estate when the decedent owned real property. The practical implication of the law is that while title may vest without a probate administration, the rights of an unsecured creditor to the decedent’s assets are: (1) the six months of a full administration; or (2) two years if there was not a full administration.7 4 KRS 395.195.