Do Your Heirs a Favor: Make a Plan for The Family Home
Francesca Maresca, 54, of Highland Park, New Jersey, had spoken in passing to her father, John, about whether he had an updated will. It was only when he died at 89 of congestive heart failure in September 2020 that she and her sister, Catherine, learned that he kept their late mother's name on the deed to the family home and they, rather than their stepmother, had inherited the house.
The sisters sold their childhood home soon after the deed was transferred to them. "There was no squabbling over things," Maresca said. "I recognize that's rare."
Indeed, homeowners who die before they decide and document what they want to do with their property can leave their relatives with a legacy no one wants: a protracted legal fight over what to do with the family home and the possibility of a substantial tax liability.
What Is at Stake?
Much is at stake. Cerulli Associates, a research and analytics firm in Boston, estimates that $84.4 trillion in personal wealth will be transferred from one generation to the next between now and 2045.
Most of it — more than $53 trillion — will come from baby boomers, people born between 1945 and 1964; another $15.8 trillion from people born before 1945. Primary residences represent more than 70% of that wealth, according to one estimate.
Members of Generation X — people born between 1965 and 1980 — stand to inherit the greatest portion of that transfer — $29.6 trillion over the next 25 years, including $8.9 trillion in the next 10 years, according to Cerulli. The millennial generation, which consists of people born from 1981 to 1996, are expected to inherit more than $27 trillion by 2045.
Such sums suggest why it is important for people to waste no time in deciding how they wish to distribute their assets — particularly their homes.
Weigh Your Options
Best Investments For Inflation: What To Buy In AHigh CPI Environment
You can transfer a home or other property while you're still alive, but Lazaro Cardenas, an estate lawyer in Freehold, New Jersey, said a drawback in doing so is that if your heirs are sued or otherwise get in trouble with the law, the property can be seized if it's not adequately insured.
Additionally, by selling their house to their child or children, parents will lose the mortgage-interest deduction on their income tax return.
However, selling your house can generate cash that you may need for nursing care and other medical expenses late in life.
"If you bequeath the property in your will, one of the benefits is you can maintain control of your home until you die," said Cardenas, a partner at Patel & Cardenas. "The drawback is that end-of-life care becomes expensive and usually is not covered by insurance."
Cardenas added that if you apply for Medicaid to cover end-of-life expenses, the agency could consider your house as your asset if you sold it to your heirs within the previous five years.
"One solution is to sell your property to your child but create a deed that states you're allowed to live in the house until you die, even if your child or children are now owners," Cardenas said.
Consider a Trust
Another option is to place the property in a trust. That way, when you die, the property passes to the trust and the trustee then owns the home. The benefit here is the heir does not have to go to probate court after the last parent dies, Cardenas explained.
"Ultimately, you can leave your property to a child, all your children or none," he added. "However, in a state like New Jersey, you cannot disinherit your spouse."
Robert "Bob" Keebler, a Certified Public Accountant based in Green Bay, Wisconsin, with clients all over the world, advises parents to get ahead of potential arguments and create separate trusts for each child if there's a lot of money involved.
"Lawyers bring CPAs in to get the math right so that there's a clear delineation of what a client wants to accomplish from an economic standpoint," Keebler said.
He gave an example of a case he worked on where a man wanted his business to go to one of his children and the other child to inherit an equal amount of property.
"In this case, Child A must pay a little bit into the business so that it's mathematically equal to what Child B gets," Keebler added.
Other cases, though, are more complicated. For instance, children from a first marriage may have an issue with a stepparent or that stepparent's children inheriting assets.
"As CPAs, we're doing the tax work and projections on the settlements to defuse the situation with the least amount of tax for the group taken as a whole," Keebler said. "We have clients who we help while they're alive, but I sometimes get brought in after someone dies, when people start to understand what's going to whom."
The most important thing a person needs to determine is whether to gift their assets during their lifetime or after death.
The Benefits of Giving
"There are benefits to giving gifts during your lifetime," Keebler said. "This is where you need to lay out a balance sheet and your goals and work with your accountants to structure your estate best."
He added that giving real estate to your heirs while you are still alive can reduce the tax they will have to pay.
Inheriting money or other assets can bring up a lot of emotions, even when there are wills and trusts in place.
Jacquette M. Timmons, the president and CEO of Sterling Investment Management in New York City, said there's often a sense of overwhelming responsibility from someone who inherits a home or a large sum of money. "There's a sense of grief; you wouldn't have this house or money if the person had not died," she said. "Many want to ensure they're a good steward of what they're left with."
Timmons advises her clients to wait at least a year before they make a big decision, like selling a home. "Time and distance bring clarity," she said. "But I recognize that waiting before deciding is a privilege that few have."
Instead of emphasizing death when working on wills and trusts, Timmons encourages her clients to view these legal documents as leaving a legacy.
Leave a Legal Love Letter
"When someone has invested the time to put together an estate plan and say what their wishes are, that's an incredible gift for the people left behind," Timmons said. "They don't have to worry about piecing things together. They can leave their loved ones with a full road map of what they'd like done. To me, that's a love letter you're leaving someone."
In Maresca's case, she and her sister spent two months cleaning their inherited home in Saddle River, New Jersey. They donated most of its contents. The three-bedroom, one-bathroom house went on the market in November 2021, and the sisters had 40 offers.
"We decided in about 10 minutes" Maresca said. "We went with the least amount of work; the investor who made a cash offer." After the sale closed on December 21, they split the proceeds evenly.
Maresca said the experience taught her the importance of communicating her wishes to her teenage son and establishing a trust in his name.