Planning Ahead…
What if a homeowner dies and leaves the house to multiple grown children? They have several choices, and the decision needs to be carefully made.
Here, we explore a few options the siblings have as they work with their inherited house.
Selling the Home Through Probate
Often, the home is sold through probate, with proceeds (after debts and taxes) sent to the beneficiaries. But in some cases, the siblings decide to accept the real estate asset itself. If they do this, the probate court will change the title, taking the deceased owner off the deed.
☛ Did the parent die leaving a mortgage debt on the home? Find out more on Deeds.com about what to do when the mortgage outlives the borrower.
Does one sibling want the house while another wants the cash value of their inherited interest? The probate court can oversee this type of distribution — if the estate has the cash assets to distribute. If not, the siblings themselves will need to fund the buyout with cash or a loan.
And if multiple heirs want to take the property and later decide it’s best to sell it, they can sell. By default, they’ll have equal interests in the property unless the deceased divided the inheritance in other fractions.
Before listing the home, they should go over the relevant tax information. A tax specialist can advise on the best way to time the transaction for tax purposes.
While they are free to live together in their newly inherited family home, adult siblings usually won’t. Perhaps they’ll use it as a vacation home, and enjoy it for special events and gatherings. But they have other options, too.
☛ If you’re keeping the home with siblings, how will you share it legally? Be ready to inform the court how you want to vest your title.
Keeping the Home as a Rental Property
In one common scenario, the siblings accept the real estate, fix it up, and rent it out. Perhaps one of the siblings has experience with property management, and everyone is on board with the idea.
In this case, it’s often best for that one sibling to have the home appraised and buy out the other sibling(s) for fair market value. Why? Sharing business responsibilities with family members isn’t always easy. For one thing, it’s hard to track and compensate the time and sweat equity put into the rental project by the sibling who handles the management and maintenance.
☛ Giving it away? Some heirs simply give their interests in a share inheritance to the others. They should understand tax responsibilities on gifts of real estate and impact on the lifetime gift tax exclusion.
But say the siblings do keep the home, and use it for shared income. If they go this route, they should see an attorney and draft a partnership contract, with contingencies and consequences spelled out for any future situation that could arise. The attorney might help them create an LLC to hold the title, along with an agreement that sets forth details like whether the siblings intend to have vacation guests or long-term renters, and how they’ll set rents and handle maintenance, potential upgrades, and an eventual sale.
Another way to anticipate and head off conflict? Hire a property management pro. Otherwise, the one who lives nearest to the house will be managing it. As noted above, that can easily lead to family disputes over burdens and fair payment.
Forming Trusts and Governance Boards
Some heirs will place an inherited home into a family trust, where it can generate a cash flow. This is something to discuss with a wills and estates lawyer as soon as possible. Creating a formal agreement now can avert crisis later.
If future generations will inherit the property, forming a governance board is a sound idea. What will this do? Think of the way homeowners’ associations create budgets, select contractors, handle unexpected expenses or disagreements, and establish rules for operating.
The more details drafted into the siblings’ agreement, the less room for back-and-forth and disputes later on. And family disputes themselves can be resolved by a method of resolution laid out in the agreement.
The siblings need to think about any fundamental changes in circumstances that could occur in the future. What circumstances would make selling the property appropriate? Who would get a right of first refusal? How will debts be resolved and a minimum listing price be set?
Even if siblings are all on the same page when their parent dies, they are wise to have a lawyer draw up a detailed agreement.
Dealing With Disagreements Involving an Inherited Home
If one owner tires of a co-ownership arrangement, the parties can easily prepare a new deed. One can quitclaim their title to the others, for example.
They can also decide to sell. If so, they should have a signed agreement so that no one has mistaken assumptions about the terms of the prospective sale.
But what happens when one owner wants to sell, and a joint owner won’t let that happen? The first step is often mediation. This process can help the owners save a lot of money in legal fees.
Otherwise, an owner could sue to force a court-ordered partition of the property. In a court-ordered partition by sale, the home is sold entirely, and the taxable sale proceeds are then distributed to the owners. The co-owners may bid in a sheriff’s sale — possibly using credit from their potential proceeds.
Going to court isn’t just costly. The process of getting to a final court decision under a complicated state law can take a long time. Court-ordered partitions involve the division of not only the real estate, but also the debts, the owners’ maintenance and management contributions, and applicable taxes. There are costs upon costs in partitions! The siblings will also need to cover the appraisal and possibly a survey, the staging and marketing, repairs, and the professional fees.
☛ If you believe an inherited home will be a burden and not a benefit, you can decline it in the first place. Learn how beneficiaries might not accept an inherited deed.
The Value of Working Things Out
Mixing heirs and real estate is a recipe for stress if the estate plan wasn’t carefully drawn out in advance. Even if it was carefully created, co-ownership among family members isn’t always easy.
Of course, every family has its unique set of dynamics and circumstances. In case of serious conflict, the starting point is a consultation with a real estate lawyer in the home’s state. No online article can substitute for personalized legal advice. We hope this article informs your thoughts about your options, though.
Throughout the journey, it’s important to remember the parent who bequeathed the home, and to consider how that parent would feel if it ended up hurting relationships. There’s immeasurable value in committing to an agreement everyone can live with.
Supporting References
Deeds.com: Guide to Selling an Inherited Home (Dec. 7, 2020).
Deeds.com: The Partition of Property – What to Do When Co-Owning a Home Doesn’t Work Out (Aug. 6, 2020).
Deeds.com: Removing Someone from a Real Estate Deed, (Mar. 12, 2019).
City National Bank: How to Manage an Inherited Property With Your Siblings and Minimize Conflict (Feb. 27, 2019).
And as linked. Photo credits: Alena Darmel and Ivan Samkov, via Pexels.