Why is Planning Important When You Expect to Inherit Real Estate?
For the same reason that planning when you inherit a large sum of money is important, because it is valuable and without planning you may lose value and increase your costs. Where you only have the expectation of inheritance, you may also want to plan on how the ownership of the real estate would go if you do not survive the current owner. Although the gift may be contingent on your surviving the current owner, so if you died first the gift would lapse, it also could go to your heirs under your will or intestate.
What are some of the complications involved in inheriting real estate?
There are three main challenges; how you own the real estate, clearing out the furniture and other household items, and sale of the real estate by the estate.
On ownership, the will could give you ownership in several different ways, namely:
- Sole Ownership – where you own all of the real estate and any fixtures,
- Tenants in Common – where you own the real estate with one or more other people and if one of you dies, their interest is inherited by their heirs,
- Joint Tenants with Rights of Survivorship – where if one owner dies, the others inherit the deceased owners interest,
- Tenants by the Entirety – which is joint tenants between spouses
- Community Property – a special type of ownership in the states of Arizona, California, Idaho, Louisiana, New Mexico, Nevada, Texas, Washington, and Wisconsin.
- In Trust – where the legal title is vested in a trustee, but the ownership and benefit of the real estate goes to a beneficiary, and
- Life Estate – where you get to enjoy the property during your lifetime, but after your death it goes to someone else.
On cleaning out a property, you would be amazed at the amount of stuff one person can accumulate over time and shipping what you want, and getting rid of what you do not want, is a large task. Remember that just because you inherit the real estate, you do not necessarily inherit the contents of the property.
Sale of the real estate, it is possible that the Personal Representative could sell the real estate you would have inherited, depending on the terms of the will. Typically, done within one year of the date of death, either because the heirs do not want to be bothered clearing things out and selling the property, or because the estate does not have enough liquid assets to meet all of the debts of the decedent. In either case, the net cash on the sale would go to you.
How long does the inheritance process take?
I will give you a typical lawyer answer “it depends”. Legally, the title to real estate vests in the beneficiary the day the decedent dies, subject to the right of the Personal Representative to sell the property for debts noted above. For practical purposes, usually the process takes a year to settle, unless there is a will contest in which case there could be years of delay.
What are some arrangements for inheritance?
There are almost as many ways of inheriting property as there are stars in the sky. The most common ways include:
- Leave the real estate equally to beneficiaries (e.g. your children).
- Leave the real estate to a trust for the benefit of people who are either unwilling or unable to manage the property. (If they owned the property it would disqualify them from receiving Medicaid or other state benefits.)
- Gift the real estate to your heirs during your lifetime, either outright or in trust.
- Direct that the house be sold, but provide that the house is offered to a child at the appraised price before it is placed on the market. If they offer to buy, they get to apply their share of the estate to the purchase price.
- Put the house into a trust now, and avoid going through probate.
- Put the house into an LLC and gift shares to the beneficiaries, and so on.
The steps I recommend are:
- If the property is inherited by more than one person, to agree that one person makes the decisions on what to do rather than having to get a consensus for everything.
- The second thing you should consider is either an attorney, to help transfer the title, or a real estate agent, if you are planning on selling the property.
- If the property is commercial property, you might also want to consider a management company, as being a landlord may not be your cup of tea.
How much does it cost?
Again, I have to say “it depends” sometimes, such as when one spouse dies and the other inherits the property as Tenants by the Entirety, there is little or no cost, just the recording fee for placing a death certificate on record. If there is a sale of the property, the broker’s commission could be anywhere from 2.5% to 10% depending on the type of real estate. Making solid estate plans and transference of ownership can save a great deal in legal and transactional costs.
What else do you recommend?
My only other recommendation is that you discuss what your plans are with your heirs, but do not promise anyone anything unless you actually carry through with the gift in your estate (or during your lifetime). By good communication, you avoid having surprises which can lead to disputes. By avoiding promises to “remember you in my will” you avoid having the beneficiary getting their hopes up that they will get more than you intend to give them in your estate. Better that they are pleasantly surprised than disappointed.
One final item to consider…
I have not discussed anything about what I call “legacy properties” that is the summer house on the shore, the apartment on Central Park, or the family homestead in the Ozarks. Not only can these properties be valuable, they are also laden with emotional meaning which, as a result, people will behave in “predictably irrational” ways when ownership is concerned. For that, I could write a book…