The California “Independent Administration of Estates Act” (the Independent Powers Act) usually allows the Executor of a Probate estate to sell real estate without Court approval or the overbid process.
Despite the right to avoid this process, most Executors seek Probate Court Confirmation.
Probate Court confirmation makes life harder for the Realtor® and in times of flat markets, often results in a lower price to the heirs. It makes the sale more complicated and conditional; the deal may be voided by an overbid. Conditional sales reduce market value.
Why do Executors choose this harder method of property sale? Who makes the decision to seek Court confirmation (which requires the overbid)? Who should make this decision?
Probate is the State’s procedure to finalize a decedent’s financial affairs and distribute his property to his heirs (and usually takes one or two years).
The Executor is the person appointed by the Probate Court to act as manager to conclude the decedent’s financial affairs and distribute the assets to the heirs named in the Will.
The Executor is given powers by the Probate Court in a document called Letters Testamentary, and there are 3 strengths of powers:
1. NO POWER: A Court Hearing for approval is required for every proposed action the Executor wants to take. This is rarely used these days. The Courts realized that the heirs were the only people who ever contested a proposed action of the Executor; usually they were in favor of the proposed action. Court Hearings were a big wastes of time. Why have a Court Hearing if no one objects?
This resulted in the California Independent Powers Act, which allows the Executor to take certain actions without Court approval, unless the heirs object.
2. Limited Powers – under the Independent Powers Act Gives the Executor the right to do anything except sell real estate.
3. FULL POWERS – under the Independent Powers Act gives the Executor the right to do anything INCLUDING THE RIGHT TO SELL REAL ESTATE.
Executors receive their power after filing an application. If requested, the Court routinely grants full powers under the Act. In other words, if the Executor wants the right to sell real estate without the need for Court confirmation, all he has to do is ask for it.
So why should an Executor desire Court Confirmation if he can avoid it? There are some perceived benefits of Court Confirmation.
1 – Theoretically, Court Confirmation gives better protection to the Executor – With a Court Order confirming the sale, he is relieved of any personal liability.
2 – Having an overbid procedure lets the Realtor® market the property twice. He can hold open houses and publicize the property until he receives an acceptable offer. Then, after getting the best possible price on the open market, he goes to Court where there is an auction to get an even better price.
3 – Bigger fee for the lawyer? – The lawyer’s regular fee is set by law; services for Court Confirmations are subject to additional fees (extraordinary fees).
It is essential to analyze each of these possible benefits to see if they are real, or worth the cost.
Selling Price – Making a sales contract conditional on Court confirmation and overbid diminishes market price.
1. Conditional on probate court Scares away some potential buyers.
2. Attracts bottom fishers.
3. Increased complexity, uncertainty, and risk results in lower offers.
4. Makes more work for the Realtor® agent.
Overbid: If the market is flat, forced sales rarely result in market value offers. Probate auctions are cumbersome, intimidating, and confusing, and rarely result in a price higher than could have been obtained by a non-Probate sale.
Does this Protect the estate Executor? The Executor is appointed to act for the estate, for the benefit of the heirs. He or she is a fiduciary and owes duties to the estate and heirs. For protection, the executor must ensure that he does nothing improperly.
His best protection is a Court Order approving his actions. Without a Court Order, if the Executor acts wrongly, he is open to liability and may be sued.
Does a Court Order confirming a proposed sale give the Executor more protection than written consent by all of the heirs?
Sometimes. Court Orders give more protection, but if an heir has consented to a sale, it is difficult for him to complain later. Normally, approval by all of the heirs to the Notice of Proposed Action is enough protection for the Executor.
However, it the Executor commits fraud or hides facts (like selling the property to a friend for below market value), neither Court approval nor the heirs’ consent will protect.
CONCLUSION – If the Executor has FULL POWERS, Court Confirmation is not needed. The Realtor® should advise the executor that he can probably get a better price without making the sale conditional on court confirmation.
Whether to use (or avoid) the overbid process is a marketing decision and not a legal one. The person hired to market the property would be the experienced Realtor®. The Executor should make the decision, with help from the Realtor® and advice from the lawyer.
Reminder that the estate EXECUTOR in California is exempt from the Transfer Disclosure Statement, but he still has a duty to disclose any known property defects. Also, there is a duty to disclose death which occurred on the property within 3 years, if the nature of the death was material.
Disclaimer: This is for information only and not the providing of legal or tax services. The specific information here might not apply to you. Before acting on any matter involving California probate and property sales, you should consult with your legal adviser and experienced REALTOR®.
Harrison K. Long – REALTOR agent for estate executors, fiduciaries, trustees, court-appointed administrators, estate planning lawyers at Orange County, CA – TrustAndProbateProperty.com – GRI, Coldwell Banker Residential Brokerage – 949-854-7747 (phone) – ExploreProperties@gmail.com (email) – CA DRE 01410855 – CAL BAR no. 69137.
Source of information for this article is Marc S. Weissman, estate planning and probate lawyer, San Francisco, California – http://www.wwlaw.com.