Inheriting a House? Navigate Your Options and Responsibilities

Inheriting a house can be a life-changing event with emotional and financial implications. Understanding your options and obligations is critical, whether you sell it, keep it, or rent it out. LendingTree insights show you how to make the most of your inheritance.

What’s the Legal Process of Inheriting a House?

When inheriting a house, you don’t immediately receive the title in your name. The inheritance process may involve probate where a judge reviews the will and appoints an executor to carry out the Testator’s wishes, a trust administration where a trustee controls the property or a non-probate option such as a Lady Bird Deed or transfer on death deed conveying the property to a person like a beneficiary designation.

These processes may involve responsibilities like insurance, identifying debts or liens and paying utilities. They also distribute belongings and manage property taxes.  In some cases, the property needs to be sold to settle the decedent’s debts and may not be inherited at all!!!

What Should You Do when Inheriting a House?

When you’re in line to inherit a house, there are steps to consider and take.

  1. Communicate with the Fiduciary: Establish a clear line of communication with the executor, trustee or other person who is handling the estate. This will help you learn the necessary information and simplify the transfer process.  This will especially help with transfers of utilities, insurance and keys.  You’ll also want to make sure the property is secure so that nothing happens to it while the estate proceeds.
  2. Insurance.  Speaking of insurance, property insurance usually has a clause in which the home won’t be insured if it’s unoccupied, such as during an estate administration.  The fiduciary may pay for insurance during an administration to protect the house, but the beneficiary should coordinate the transfer at the end of the administration to ensure the property is insured.  
  3. Coordinate with Co-Heirs: Work with the others if you are one of several heirs. Avoid costly disputes by deciding whether to sell, keep, or rent the property.
  4. Determine Property Value: An important step in estate administration is valuing the property as of the date of death which may be done by an appraisal or other means.  The new owner needs this information to determine whether to keep, sell, or rent the home while informing you of tax liabilities should you sell the property in the future.
  5. Evaluate Debts: Identify any liens or debts tied to the property and compare them against the house’s value. Understand the financial implications and incorporate that into your decision.  With mortgages, you may be able to continue paying the existing mortgage, and if not, can consider refinancing.
  6. Seek Professional Advice: Consult estate planning attorneys, accountants and financial advisors. These professionals can clarify ownership-related problems, such as debt obligations and inheritance taxes and how to rent the property.
  7. Update your Estate Plan.  Receiving real estate is often a reason to review and maybe update your own estate plan.  Going through the estate process to receive the house is invaluable experience in determining how you want to leave the property to others.

What Should You Do with the House?

Moving Into an Inherited House

Moving into the inherited house can provide a new residence or vacation home. However, this option can be costly due to mortgages, taxes, repairs and insurance.

Renting Out an Inherited Home

Renting out the property can provide passive income, while keeping it in the family. Buy out other heirs or work with them to share costs and rental income.  This is certainly more work, but might help reduce costs while figuring out a long term plan.

Selling Your Newly Inherited Home

Selling the house is a straightforward way to obtain immediate cash. The proceeds can help pay off debts tied to the house, and the remaining proceeds will go to the heirs.  I often encourage people to consider this first because keeping the house is an obligation and ongoing expense that sometimes get’s out of hand.

For more information, see this article on inheriting property.  https://galligan-law.com/inherited-property-what-you-need-to-know/

In all cases, talk to an estate planning attorney if you have questions on inheriting a property and how this impacts you, your loved ones and your estate plan.

Reference: LendingTree (Nov. 16, 2021) “Inheriting a House? Here’s What to Expect”

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Estate Tasks to Complete After a Loved One Passes

Estate planning clients occasionally ask for a list of steps or estate tasks to take after their passing to give to their loved ones.  I’ve always resisted making such a list because the exact steps change over time and don’t always apply depending on the circumstances at that time.  That said, there are some general steps that your loved ones or your fiduciaries may need to take which I’ll address here.

This is somewhat based upon the recent article, “11 Financial Steps to Follow After the Loss of a Loved One,” from U.S. News & World Report, although I added some of my own estate tasks.

Grieve. I heard a very venerable estate attorney say to a client that this is always the first step.  Many of the tasks on this list are important, but rarely so urgent that you can’t take a week to attend to the funeral or final services, contact family and friends, arrange an obituary and grieve.  So, start there.

Obtain a death certificate. This usually comes from the funeral home. You’ll want to get five to ten original certificates, which will be used for various legal and financial matters.  You rarely need that many, but it is very easy to get them once a loved one dies, very difficult to get more later if you run out, so a few extra is a great idea.  If the decedent was a veteran you can get them for free.

Gather financial documents. This includes estate planning documents, a will, a trust, bank and investment account information, utilities and bills, insurance policies and tax returns.  This is very time intensive so hopefully the decedent had a complete estate plan, let the fiduciaries know how to access the documents, assets and liabilities in advance of their passing.

Reach out to advisors. This includes the estate planning attorney, financial advisor, CPA and other professionals working with the deceased. They will be able to offer guidance as you go through the process of managing the estate.  Do this on the early end and with as much of the financial info on hand as you can so they can provide you with more specific steps to take.

Contact any government agencies. If your loved one was receiving benefits from Social Security, the Veterans Administration, Medicare, Medicaid, or any other government agency, you must notify them of the death. The funeral home may have already sent the SSA a notification, which is most common.  You may still want to confirm if it has been sent, as the ultimate responsibility for notification is the surviving spouse or adult child.  You’ll know it happened when Social Security pulls the last retirement payment out of the account after death.

Contact financial institutions. The financial institutions, including commercial banks, brokerage accounts and insurance companies, will all need to receive an original death certificate. If there is a POD (Payment on Death) order, the balance on accounts will be transferred to the designated beneficiary. If there are life insurance policies, you’ll need to find the policy and identify the designated beneficiary.

This process can occur here, later in an estate administration or both, and can go in many different directions depending upon the assets. Generally, the goal is to remove the decedent’s name from all accounts of every kind and then distribute the remaining assets to the beneficiaries in accordance with the estate plan.

Avoid identity theft. Contact credit agencies, including Experian, Equifax and TransUnion, to notify them of the death. You may need to contact one for the others to become aware. You should also close the social media accounts of the deceased. Depending on the platform, you may only be able to memorialize the account instead of deleting it.

Other important institutions to contact. The post office will need to be notified, although you may first want to have the person’s mail sent to your home directly. The motor vehicle department needs a notification of death to stop renewing licenses. Unions and professional, service, or fraternal organizations should be notified. There may be survivor’s benefits.

Prepare the final tax return. There are two tax returns to be aware of—the final income tax returns and the estate tax returns. Your estate planning attorney will know the deadlines for both if they apply.  There is actually a third, which is the estate’s income tax return, although that doesn’t always apply.

Filing the will with the probate court/estate administration Once the will goes through probate and is approved by the court, the executor will be able to distribute the deceased’s assets in accordance with the will. If there is no will, the distribution will be overseen by the court and follow the state’s intestacy laws.  You may also utilize a trust to avoid most of this work.  This is the main estate task people anticipate.

Settle any remaining debts. In most cases, the remaining liability on a mortgage or car loan will be payable by the person inheriting them. All other forms of debt, like student loans, credit cards and medical loans, will be charged against the decedent’s estate.  However, and I stress this, discuss debts with the estate administration attorney.  Many estate administration clients try to move fast and pay debts without requiring validation or considering whether they should pay it.  Many states, Texas being an excellent example, have laws limiting estate liability for debts, so they may not have to be paid in the first place.  Creditors also (in most cases) can’t collect the decedent’s debts from beneficiaries, so family should avoid paying debts from their own assets.

This is a complex issue, so see this article for more detail:  https://galligan-law.com/do-i-have-to-pay-the-estates-debt/

There are of course more detailed estate tasks to complete, so speak to your professional advisors when the time comes to determine what steps to take.

Reference: U.S. News & World Report (Sep. 1, 2023) “11 Financial Steps to Follow After the Loss of a Loved One”

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Top Five Mistakes to Avoid When Passing your Legacy

Many families think of the transfer of their wealth and values from generation to generation as an important legacy to their loved ones. A report from Cerulli Associates says approximately $84 trillion will be passed from today’s older generation to heirs by 2042.

As a firm that focuses on legacy planning, we recognize how important for this legacy to succeed.  In order to successfully transfer legacy to the next generation, families and their loved ones should consider the pointers in a recent article from yahoo! finance, “Don’t Make These 5 Mistakes When Passing Down Generational Wealth to Your Family.”

This is by no means an exhaustive list and all situations are different, but consider each in how it affects your legacy to your loved ones.

  1. Prepare beneficiaries for their inheritance. I’m not always a fan of this as sometimes it creates an unhealthy expectation, but considering speak with your loved ones about how their inheritance might change their lives. Educate them early on about personal finance, and introduce them to your advisors, including your estate planning attorney, financial advisor, and CPA. This is especially true with natural heirs, such as children or grandchildren.
  2. Teach heirs how to be financially independent. This is more specifically a family problem, but problems can occur if children expect to receive an inheritance and don’t think they’ll need to work. This could get in the way of their personal and professional growth, and unfortunately is almost never true. A recent study showed that the average time it took to spend an inheritance, regardless of its value, is 4.5 years. You want them to know how to support themselves and the value of money earned, while benefiting from the legacy you leave them.
  3. Make sure to diversify your portfolio. When did you last increase your 401(k) contributions or diversify your portfolio? Be mindful of your investments. You don’t want to overestimate the value of your wealth or leave your children with an out-of-date investment portfolio, or have it shrink due to mismanagement.
  4. Involve your beneficiary in the family business. If your legacy includes a family business, you need to consider the importance of ensuring that whomever you wish to leave it to is fully involved in how the business operates and its financial needs and goals. If you simply toss them into the business without completely understanding it, the transition may not work, or in some cases, lead to catastrophe. As a result, your years of hard work could disappear quickly. A succession plan should be in place, so everyone knows what is expected of them.
  5. Don’t neglect your estate planning. Sit down with an estate planning attorney and create a comprehensive estate plan, including a last will and testament, power of attorney, health care power of attorney, living will, and any trusts needed to pass wealth to the next generation. Do this long before you expect it to be needed. A major mistake is people want to do the first estate plan when they are 85, and aren’t willing to accept that they might not be capable, or that incapacity will be an issue long before.  If you fail to create an estate plan, you may be left with a mess for your heirs (next of kin, not beneficiaries you choose) to figure out. It could take years before they receive the assets you want them to inherit.

For more ideas on this topic, see this article on wealth transfer and legacy:  https://galligan-law.com/common-wealth-transfer-mistakes/

Reference: yahoo! finance (June 5, 2023) “Don’t Make These 5 Mistakes When Passing Down Generational Wealth to Your Family”

 

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