Your question illustrates a poorly drafted will. I hope it was not written by an attorney. When I write a will or a trust, I spend a lot of time asking the client questions like, "I know you don't want to think about this and hopefully it never happens, but if your daughter and husband predecease you, who do you want to get your property?"
In the case you write about Grandma's real estate does not pass under the will because the gift fails because no one who survived Grandma is named in the will.
So what happens, is that the real estate goes to the "intestate heirs," the people who would inherit if there was no will. Assuming Grandma's parents, husband, and single child (your mom) all predeceased her, the real estate is divided evenly between you and your sister. So, yes, the real estate passes by law (thru the set aside probate process) to the predeceased daughter's issue in this case. BUT, if Grandma had left her real estate to a friend and the friend predeceased her and the will did not provide that the real estate to anyone else, then the real estate would have gone to blood relatives, not to issue of the friend.
Finally, if Grandma had left real estate to any Person A, related or not, and Person A survived Grandma but died before the probate, then the real estate would go to Person A's estate.
The real estate goes to the "intestate heirs," the people who would inherit if there was no will.
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