Homeownership is often part and parcel of the American dream, and for countless families, the house is the primary asset in the eventual inheritance. But what do you do when you inherit a house?
Do you need to amend a deed? Sign or fill out a change of ownership form? Pay more taxes? Settle a debt? Take out a mortgage? Or start looking for buyers?
Let's take a deep breath and take this one step at a time.
Let's say you stand to inherit a house. 'Maybe you are an only child, and it's a matter-of-fact that the house you grew up in will pass on through your parents to you. Maybe your grandfather has revealed that he’s planning to give you his summer vacation home.
If the house's current owners are alive and well, then it might be worth discussing the best way to transfer property with them.
There are different ways to bequeath real estate, depending on the property's circumstances (is it an investment? A rental property? A primary residence?) and the state you live in. Most of the time, people will opt for the most straightforward choice – a will. Anything in a will must pass through probate, a mandatory process through which the will is legitimized and the transfer of assets is overseen. A last will and testament is a set of legal instructions in probate court by an appointed executor named by the court (and optionally specified by the will).
If a person dies without a will, their estate (belongings) may be distributed per local intestate laws. Most of the time, this means the estate is split between the next of kin – usually half-and-half between a spouse and child, a 1:2 ratio between a spouse and multiple children, or other constellations depending on the family situation and local laws.
A will gives greater control than no will because the decedent could specify who gets what. But a trust goes a step further.
A trust is an agreement between a grantor, a managing trustee, and the recipient beneficiary. Trusts are legal entities in their own right and become the owner of whatever is funded into them. The trustee is an impartial financial manager who acts in the best interests of the beneficiary (and the original wishes of the grantor). Whereas a will is a set of instructions, a trust is more complicated – it requires active management by a human being or an organization. It goes into effect the moment it is created rather than upon death.
Then there's the option of circumventing both trusts and wills and the probate process. In some states, houses can be transferred to designated beneficiaries at the time of death via a transfer-on-death clause, also known as a Totten trust. However, this is more like a deed that affects the owner's death than a trust.
Are you going to become the sole owner of the house? Or will you share its equity with co-owners?
Real estate is typically co-owned through joint tenancy (everyone gets an equal share) or tenancy in common. When a parent bequeaths a house to multiple children, it will usually be a joint tenancy. Of course, it often isn't that simple. Multiple adult children may not want to share the same residence, especially if it is a one-family home. Similarly, giving the home to only one child might trigger a sibling rivalry.
Take the time to figure out with your parents or other relatives how your family should divide interest in the home or manage the property moving forward, especially if you have not inherited it yet.
Whether or not you intend to keep the house, you will likely need to set up a change of ownership. This is usually done through a form that details who owned the house before you and includes your details.
Property taxes are paid based on property value – usually, when a property changes hands, it must be reassessed and updated. This often leads to an increase in property taxes for the next owner. If the house was a primary residence endowed by a parent or grandparent, it might not require an assessment for property tax purposes. But if you inherit a house within the family, chances are that you will be exempt from reassessment.
Nevertheless, once your ownership is established, you can continue to manage the property as an investment, as your own home, or get ready to sell it.
"Owning" a home and being a complete real estate owner are two separate things. Depending on the circumstances, your inheritance may become a financial burden you might not be able to afford.
Furthermore, you may look at additional HOA fees and property taxes that might be too much for your current income or situation, even on their original basis. Under these circumstances, your best bet might be to cut your losses and determine whether you want to sell.
Property law, tax law, and family law are complex fields, and depending on where you live, when you stand to inherit. Individual factors which are impossible to name, your best options and priorities may shift and change. Whether you're about to inherit a house, likely to inherit a house, or have already inherited the property and are unsure of your next steps, it's important to clarify every question you might have with an on-hand professional who can specifically cater to your needs and requirements.
Contact an estate planning professional to learn more about what you should do now that you have/will inherit a property.
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