Q: What happens if a person who is an heir in an estate dies before the estate pays out the inheritance? Would it be any different if it were a trust?
A: I think what you are asking is what happens if a person dies and then one of his heirs dies after him. In other words, John Doe dies leaving a bequest to Jim Doe and then Jim dies after John but before final distribution.
As with anything involving estate planning and settlement: check the document.
The death of an heir during administration is not entirely out the realm of possibilities. Therefore, a lot of attorneys will plan for it.
Attorneys generally plan in a couple of ways to address the death of an heir during the administration of an estate. The first is by adding a survivorship clause to the will. The survivorship clause essentially requires any person receiving a distribution from the estate to survive the testator for a period of time. For example, the will may provide that any beneficiary under the will who fails to survive the testator by 60 days is deemed to have predeceased them. If the beneficiary fails to survive for the 60 days, the will directs who receives their share.
Another approach is to actually provide that if a beneficiary fails to survive until final distribution, their share lapses and goes to a contingent beneficiary. Language such as that would require a beneficiary to survive to final moment of distribution.
Also remember that survivorship language such as this isn't limited to a will. Survivorship language is often included in trust documents to plan for an unanticipated death of a beneficiary.
If the will, or a trust for that matter, is silent on the survivorship requirement, the distribution will likely become an asset of the deceased heirs. In that case, it would be handled exactly like any other probate asset of the deceased heir and would transfer according to his or her estate plan.
Remember that this applies to a situation where an heir survives a testator but dies before distribution of his or her share. If the heir dies before the testator, the will or trust will most likely provide for what happens to their interest. Indiana also has an anti-lapse statute to address situations when certain heirs predecease a testator.
Now some of you might be thinking that things like this rarely happen. However, the truth is it happens more than you think. I've seen a number of situations when a person leaves a bequest to a sibling and that sibling dies during the estate administration. It's certainly not common but it does happen.