Inheriting property, while often seen as a blessing, can feel like navigating a corn maze while blindfolded. The process is fraught with paperwork, legal issues, and potential tax implications. Whether you're dealing with an unexpected inheritance or just planning ahead, a little knowledge and a simple plan can help you avoid future headaches, save money, and even preserve family relationships.
1. Initial Challenges
Upon inheriting real estate, heirs might be faced with:
Existing Debts: The property might come with unpaid mortgages or other debts. These debts will become the responsibility of the heirs and will need to be paid prior to selling the property.
Maintenance and Upkeep: An older home might require immediate repairs or updates. For properties with significant deferred maintenance, heirs who intend to sell on the open market must decide whether to list the property “AS-IS” and take a lower price or invest into making the dwelling “move-in” condition.
Multiple Heirs: If several individuals inherit the property, decisions about selling, keeping, or renting need consensus among all heirs - which can be challenging even when all parties involved like each other going in.
2. Wading Through Probate
To many, the term "probate" is a nebulous, even daunting concept, but think of it as the legal process of settling the estate of a deceased person.
When is Probate Required? Whether a property must go through probate depends on how the property is owned. If the deceased owner previously placed the property in a trust, then the property is not part of the “probate estate”. Upon the owner’s death, the property will remain in the trust or will be transferred as the trust terms may require. Another instance when probate can be avoided is when the decedent co-owned the property with a surviving spouse or some other joint owner with a right of survivorship. Upon death of the owner, title will automatically pass to the surviving spouse or joint owner without need of going through probate. However, if the decedent was the sole living owner or if a surviving co-owner had no right of survivorship, then any transfer will require the probate court’s involvement.
What's the Process? If probate is required, the court will appoint a personal representative who will gather assets, pay debts, and distribute remaining assets to heirs. If the decedent left a will, the court must first confirm the validity of the will, and the personal representative will usually be whomever is specified in the will. In the absence of a will, the court will typically name the next living kin as personal representative according to following legal order of priority: 1) spouse, 2) children and their descendants, 3) parents, 4) siblings and their descendants. The personal representative must give proper notice to the decedent’s heirs and any person or entity named in the will, for example a charity. The probate process can take anywhere from 30-60 days for simple estates to a year or more for complex or contested estates. In order to sell real estate out of probate, the court must issue a “license to sell”, unless the will specifically authorizes the personal representative to sell the property, which most wills do.
1. Determine if the property needs probate.
2. Identify the personal representative named in the will, or in the absence of a will, petition the court to appoint one.
3. But first and foremost, seek legal counsel. Attention DIYers, penny-savers and Legal Zoomers: the stakes are high. Hundreds of thousands of dollars high - or more. Even with a seemingly simple estate, one small mistake can tie up a property and make it unsellable for months or even years until the mistake is fixed. We know. We’ve been hired as the clean-up crew on multiple occasions.
3. Tax Implications – The Not-So-Fun Part
When you inherit a property, it's crucial to understand the tax landscape.
Capital gains tax: A silver lining? Typically, the property’s tax basis will be "stepped-up" to its current market value. This means if you sell, you'd only owe capital gains tax on the difference between the property’s market value at the time of inheritance and the sale price. Effectively, this wipes out the taxable gain that accrued during the decedent’s period of ownership, which translates into a massive savings for a property that’s been in the family for many years or even decades.
Estate Tax: Massachusetts has an estate tax on estates valued at more than $1 million. Even if the property you inherit doesn't reach this value, you must consider the cumulative value of all inherited assets. Unless the estate is valued well over $10 million, federal estate taxes will be avoided.
Property Tax: Local property tax rates are not impacted by the death of the owner. However, make sure payments remain current to avoid penalties.
4. Initial Steps in the Real Estate Inheritance Process
Consult Professionals: Engage an attorney, together with a tax advisor or financial planner to navigate the intricate details and establish a plan.
Consider Your Options: Decide if you want to keep, rent, or sell the property. If there are multiple heirs, this will be a collective decision.
Get a Property Valuation: An appraisal will determine the property’s value at the time of death and simplify tax determinations down the road.
Inheriting property can seem overwhelming. However, with the right knowledge and guidance, you can make informed decisions that honor the legacy of your loved ones while securing your financial future.