Deborah Badillo’s client inherited a home and planned to move in during renovation.
Bees in the attic beat the client to it.
The client had to maintain two homes simultaneously, which hadn’t been in the budget, while awaiting the bees’ expert handler to move them to a new home first.
“They did get some honey out of it,” says Badillo, a financial planner with Meira Wealth in Miami, Fla.
Property heirs caught unaware is common.
A recent survey found 68% of Americans plan to leave real estate — home, vacation home, land, etc. — to their heirs.
But 56% haven’t told their heirs of these plans, according to the 3,325 Americans who Ameriprise Financial surveyed this year for its Money & Family study of ages 30 to 70 with at least $100,000 in investable assets.
Only 19% of respondents say they’ve been fully transparent with relatives about their finances or giving plans.
The biggest reason given: “It’s none of their business.”
Financial advisors, planners, accountants and lawyers say it is the heirs’ business, and professionals can influence both givers and heirs to ease that communication.
Investors surveyed want to leave their real estate to loved ones, but:
- 15% worry their heirs won’t be able to afford the upkeep and taxes.
- 14% are giving it to more than one heir and anticipate they’ll have conflicts.
- 13% fear their heirs will sell the property quickly.
“For future clients, I ask them to have a conversation to determine if the kids want to inherit the house,” Badillo says. “Do they plan to live in it? If the house has a mortgage still, will the kids be able to refinance the loan to them?”
Badillo says she often suggests clients sell the home before moving into assisted living and leave the money to the children instead of the homes.
Hannah Szarszewski, the founder of Blue Mountain Financial Planning in Melissa, Texas, said family members who inherit a house together may not agree on what to do with the real estate. “Some may want to sell and some may want to keep the property. In many cases, there will be at least one family member who doesn’t want to pay for upkeep and maintenance on the real estate property,” she said. “If the property doesn’t have income associated with it, the maintenance bills can be a big burden to heirs. This can lead to tension and stress between heirs, especially when there’s a wide variance in income between them.
But leaving high-value property in a will does have advantages, especially if it’s highly appreciated and eligible to receive a step-up in basis at the owner’s passing, says Nicole Sullivan, director of financial planning and co-founder of Prism Planning Partners in Libertyville, Ill.
“I had a client who inherited her mother’s highly appreciated home and ended up saving thousands on taxes compared to if her mother had sold during her lifetime,” she says.
Attorney Deborah Danger of Danger Law in Newton, Mass., explains: If property is willed as an estate asset, the capital-gains clock is reset for date of death, instead of date of family purchase.
If a client bought a primary home 50 years ago for $10,000 and sold it for $500,000, the cost basis would be the purchase price plus any long-term capital improvements. Assuming no such improvements, the client would have capital gains of $490,000. The first $250,000 ($500,000 for a married couple) on a home sale is excluded from capital gains taxes, which would reduce the taxes from about $100,000 to $50,000, Danger says.
If the owner didn’t sell and the fair market value of the home was $500,000 when she passed away, her heirs would not owe capital gains on the inherited property. They would only pay capital gains if they later sold the house for more than new $500,000 cost basis.
William R. Parrott of Parrott Wealth in Austin, Texas, says he feels it’s better for his clients not to sell their house in advance and leave cash to heirs.
“I recommend the homes pass to the heirs through a will or trust to receive the step-up in cost basis and avoid a capital gains tax if they decide to sell the home,” Parrott says.
“If the family puts the home in a family limited partnership, the heirs will inherit the cost basis of the home, which could trigger a large tax bill if they sell the home,” he says.
Clients bequeathing real estate should weigh relevant taxes, laws and public policies, and talk it over with their executor or trustee, Danger says.
Their executor or trustee has a legal fiduciary responsibility to manage estate assets to the benefit of all beneficiaries until assets are liquidated and distributed, she says.
It’s a big job, even with simple estates. Rental assets, businesses and vacation homes add legal burdens for the executor or trustee – and the personal family dynamics add more land mines, she says.
That’s why Danger encourages the use of professionals to serve as estate trustees.
A client of Lawrence K. Pon, a California CPA and member of the Financial Planning Association, had to sue her sister.
Their mother made her unemployed daughter the successor trustee for her three heirs, including his client, who was a banker, and her brother, a retired policeman.
“(The sister) had no clue what it means to be a trustee. She did everything wrong,” Pon says.
The sister used Mom’s money to buy a luxury car for herself, shop at upscale stores and eat at the fanciest restaurants, he says.
“She was living in the house owned by the estate and she was not paying rent, nor did she move out so it could be rented out,” Pon says.
“It was a very nice, large house in San Francisco that could have earned many thousands per month,” he says, to benefit the three heirs equally, as required by law.
Meanwhile, the sister neglected a multi-unit apartment building Mom owned. Disgruntled tenants moved out. It sat empty for years, sapping property taxes from the estate but collecting no income, he says.
“The mother justified naming this daughter because she had more time than her siblings. That was because she was unemployed!” Pon says.
“That probably was not a new dynamic in the family,” Danger says. “My experience is that families replicate patterns that have existed for years.”
Pon’s client and her brother went through at least four estate lawyers trying to control their sister, but they ultimately could not.
“They had to find a litigation estate attorney to sue the sister. What a mess,” Pon says.
Last he heard, that bore no results either, and both siblings had received none of their share of Mom’s estate.
“There’s a perception these documents are all you need and that’s sufficient, but like anything, documents are open to some interpretation,” Danger says.
“Have frank conversations” with each beneficiary to tell them what their inheritance entails — and tell them if favoring one heir over another, instead of leaving ugly details and inconvenient truths to that beneficiary to explain, Danger advises.
Grantors can make it easier for their heirs by spelling out their intentions in an estate plan, or identifying specific funds to pay for home transaction/care costs, Sullivan says.
Know before you go if all heirs want to sell or to keep inherited real estate to live in or rent as income-producing property, Pon says.
It’s common for one sibling to want to keep the house while others want to sell, he says. Some want to renovate before selling to try to add value, while co-heirs disagree with that strategy.
“Usually, the sibling who wants to keep the property is in no financial condition to buy out the siblings,” Pon says.
Pon says he has had clients who rent out their inherited property to build wealth and find they enjoy the landlord business.
“However,” Pon says, “in most or all cases, the children have no interest in becoming landlords.”
A new cottage industry has sprung to serve vulnerable parents and beneficiaries, Danger says. Daily money managers can maintain ledgers and budget family members for regular and episodic spending.
Their fees are often money well spent, compared with the assets and relationships harmed when trustees who are co-heirs aren’t prepared for the job ahead of them, she says.
“It can be difficult to replace or remove a trustee,” depending on the way the will is written, Pon says.
“This is why trusts need to be written carefully and should be reviewed by a third, unrelated party,” Pon says. “Fortunately, clients have given drafts of their trusts to me. Although I am not an attorney, I am able to raise questions.”
Sullivan says things went smoothly for her client who inherited her mother’s highly appreciated home because of clear communication before the mother passed.
“Inheriting real estate can be very tricky. This is when all the family dynamics come up,” Pon says. “Of course, we would hope this process will go smoothly, but that never seems to happen.”
‘Get on same page’
The Ameriprise survey concluded three tips:
- Communicate your wishes in advance to ease potential family tension, especially if the property will be divided among multiple people.
- Have a detailed plan that outlines key information about the property such as maintenance costs, taxes, and potential improvements that may be needed.
- Understand the tax implications of gifting real estate during your lifetime.
Jason Siperstein, president of Eliot Rose Wealth Management in Rhode Island, asks clients to have a series of conversations with all the stakeholders to make sure they want the real estate and the intentions for it are transparent.
“Get on the same page,” Siperstein says. “If they don’t want it, disposing of it can be a pain … even more so if the beneficiaries live out of town!
“At the end of the day, the goal is to create a smooth and equitable transition of assets,” Siperstein says. “Emotions will already be running high due to a death in the family, so leaving as few surprises as possible goes a long way.”
Linda Hildebrand is a longtime newspaper editor and consumer reporter.