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 Planning Checklist for 2024

Estate planning is more than writing a will; it’s a plan to manage the legacy you want to pass to your loved ones.  It documents your healthcare preferences, prepares for aging and incapacity and conveys your assets to those you choose.   The National Council on Aging (NCOA) Adviser’s article, “Estate Planning Guide and Checklist for 2024,” offers an overview of what to consider when planning your estate.  There is no perfect checklist as all estate plans should be tailored to the individuals using them, and so what you may want or need could vary, but it’s certainly a good idea of what to consider.

So, this blog will cover an estate planning checklist for 2024.

Understanding Estate Planning

Estate planning organizes your affairs to fulfill your wishes after you pass away. It encompasses decisions about money, property, medical care and care for your beneficiaries. The process includes creating essential documents like wills, trusts, powers of attorney, medical documents and more.  Estate planning provides peace of mind that your wishes are known and respected, benefiting your loved ones, so it is important to consider all of the key documents in the estate planning checklist.

Key Documents in Estate Planning

  • Wills: A legal document that outlines how to distribute assets after your death.
  • Trusts: Contracts that allow a third party, or trustee, to hold property and other assets on behalf of a beneficiary.  These are used for many purposes depending on what kind of trust, such as tax planning or probate avoidance.
  • Powers of Attorney: Legal documents that grant someone else the authority to make decisions on your behalf, such as if you want to delegate to someone or because of your own incapacity.
  • Medical Documents: Documents that state your wishes regarding medical treatment when you cannot communicate your choices.  These, depending on your state, including documents like medical powers of attorney, directive to physicians (living will), HIPAA authorization or similar documents.
  • Disposition of Remains. Some states, such as Texas, have a standalone estate planning document that indicates what your final disposition wishes are, such as cremation or burial, and who is in charge of seeing that through. Other states work these concerns into existing documents.
  • Guardianship for Children.  This isn’t applicable to everyone, but if you have minor children you can name a guardian to care for them should you pass away.  This is often one of the main reasons why young couples even consider estate planning.

Key Takeaways

  • Common Estate Planning Documents: Wills, trusts, financial power of attorney and medical documents are fundamental to estate plans.
  • Everyone Needs a Will, but Consider a Trust: Regardless of the size of your estate, a will is crucial to fulfill your wishes.  What you do beyond that is dependent on your goals and situation, but always consider a trust.  People tend to assume a trust is only for the rich, but trusts are very versatile and help with many client concerns in a way that wills cannot.
  • Review Your Estate Plan Regularly: The original article says update your estate plan regularly, I say review it.  If you don’t review it regularly, it is easy to  forget the details, which makes the estate plan difficult to properly implement and even harder to update.  2024 is an excellent year to review because the estate tax thresholds are changing in 2026, exposing more clients to estate taxes than in the past.

Conclusion

Consider estate planning to be a critical process to protect your assets, provide for beneficiaries and have peace of mind for the future. Follow the estate planning checklist to create your personalized estate plan.

Reference: NCOA Adviser (Aug 21, 2023): Estate Planning Guide and Checklist for 2024.

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Can I Decline an Inherited IRA?

The rules governing inherited Individual Retirement Accounts (IRAs) have changed over the years. They have become even more complex since the passage of the original SECURE Act with the passage of SECURE 2.0. The inheritor of an IRA may be required to empty the account and pay taxes on the resulting income within 10 years. In some situations, beneficiaries might choose to execute a Qualified Disclaimer and avoid inheriting the IRA, according to a recent article, “How to Opt Out of Inheriting an IRA” from Think Advisor.

Paying taxes on the distributions could put a beneficiary into a higher tax bracket. In some situations, beneficiaries may want to execute a Qualified Disclaimer and avoid inheriting both the account and the tax consequences associated with the inheritance.  Sometimes clients would rather pass wealth to another person or later generation, and income producing assets such as IRAs are attractive options for that.

Individuals who use a Qualified Disclaimer are treated as if they never received the property at all. Of course, you don’t enjoy the benefits of the inheritance but don’t receive the tax bill.  See here for more on how disclaimers work.  https://galligan-law.com/can-you-refuse-an-inheritance-disclaimer/

Suppose the decedent’s estate is large enough to trigger the federal estate tax. In that case, generation-skipping transfer tax issues may come into play, depending on whether there are any contingent beneficiaries.

An experienced estate planning attorney is needed to ensure that the disclaimer satisfies all requirements and is treated as a Qualified Disclaimer. It must be in writing, and it must be irrevocable. It also needs to align with any state law requirements.

The person who wishes to disclaim the IRA must provide the IRA custodian or the plan administrator with written notice within nine months after the latter of two events: the original account owner’s death or the date the disclaiming party turns 21 years old. The disclaiming person must also execute the disclaimer before receiving the inherited IRA or any of the benefits associated with the property.

Once the disclaimer is made, the inherited IRA must pass to the remaining beneficiaries without the disclaiming party’s involvement.

This is very important, but the disclaiming party cannot decide who will receive their interests, such as directing the inherited IRA to go to their child. Instead, the asset goes to the next beneficiary as if the disclaimer passed away before the account holder.  If the disclaiming party’s child is already named as a beneficiary, their interest will be received as intended by that child.

The person inheriting the account must execute the disclaimer before receiving any benefits from the account. Even electing to take distributions will prevent the disclaimer from being effective, even if the person has not received any funds.

In some cases, you may be able to disclaim a portion of the inherited IRA. However, these are specific cases requiring the experience of an estate planning attorney.

Reference: Think Advisor (Feb. 8, 2024) “How to Opt Out of Inheriting an IRA”

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