The blog post below comes from Adam Bartsch, Esq. from NorthEast Estates and Trusts in Shelburne, Vermont. It addresses many of the issues and decisions that arise when inheriting a home. We found it to contain some valuable information and thought it may help answer some of your questions if you are going through this experience.
An inherited house can be a field of landmines, some personal, some practical. The personal ones come first, when entering the newly vacant house for the first time. It feels empty until you realize how full of stuff it is. Sifting through the contents requires pushing through a thicket of memories and letting go of some possessions that contributed to a parent’s identity. It’s not feasible to hold on to everything, nor would you want to, but releasing some things reinforces the finality of a loved one’s death. Emptying out and cleaning up a house often takes much longer than initially anticipated, so build in some extra time to get this task done.
Over time, the landmines become more practical. There are some legal issues to address, responsibilities regarding property security and upkeep, the need to address long-term options of what to do with the property, and other issues that might need to be considered during this process.
This NEET Notes provides an overview of some of these practical issues you should be aware of as you move through the process of handling an inherited house.
Legal Issues: The main legal issues require not moving too fast. Before doing anything other than
securing the premises, check the decedent’s estate planning documents. The decedent’s will or trust should address to whom the house will pass, even if the house is not specifically mentioned. Where uncertainty exists, it can usually be resolved by an estate planning attorney.
Separate from the real property, the house is likely full of personal items, which may pass to the person who inherits the house or to someone else. What happens to these personal items will likely be addressed in one of two areas. The first is a section in the will or trust where specific gifts are designated to pass to a specific person. However, a list might exist outside of the will or trust, on a separate document called a Personal Property Memorandum or something similar. Typically there is language in the will or trust that incorporates the memorandum into the will or trust. The benefit of this approach is that it allows greater flexibility in naming who receives a gift, because a document outside the will or trust can usually be modified without needing to formally amend the will or trust if the owner changes their mind.
Most often, only a few items of personal property will be specifically identified in the estate planning
documents. The rest will be addressed through language that names a person or group of people to split the remaining personal property items among themselves in a roughly equal manner.
It’s important to remember that probate and trust administration are processes with rules and expectations, so don’t take any actions immediately that might have to be undone later.
Property Security and Upkeep: Whether you are the Executor, the presumptive Executor (the person named as Executor in the will, but not yet appointed by the probate court), or the Trustee, you have responsibilities. First is securing the property against vandalism and theft, such as changing the locks and preventing unnecessary damage, by making any repairs to preserve the value of the property. The homeowner’s insurance company should be notified and the policy updated. Further, ongoing utility bills should be identified and paid as needed. If a service has been shut off, such as winterizing a home by draining the pipes, be sure you make that known to workers and others visiting the residence. For instance, use masking tape to tape down the toilet seats with the reminder written on the tape that the water was turned off. Arrangements should also be made to continue outdoors property maintenance, such as cutting the lawn or snow removal from the driveway so emergency vehicles can access the premises.
Next, determine when mortgage payments, taxes and other property-related fees are due. These sorts of expenses should continue to be paid on time even if you need to advance the estate funds to do so.
Once appointed as Executor, or if you are Trustee, consider getting the house appraised by a
certified appraiser. The principal reason for this has to do with taxes, but there are other benefits. An appraisal is stronger evidence of a property’s fair market value than a town or city assessment. Assessments can be out of date and therefore understate the current value of the home. An accurate appraisal establishes the date-of-death value for capital gains purposes. This is important because the owner’s cost basis in the house might be very low. If you sold the house, capital gains would be due on the
difference between the cost basis and the sale price. The good news is that the law allows a step up in cost basis to the fair market value on the owner’s date of death. As an example, if your parents bought the house for $35,000 decades ago, and you end up selling it for $275,000 after inheriting it, absent a step up in cost basis there would be a capital gains tax on $240,000 (sale price less cost basis). However, because of the step-up in cost basis, the cost basis will get adjusted to the fair market value on the date of death. Absent an appraisal, suppose the town assessed value is $225,000. Then there will be capital gains exposure of $50,000. If you had the house appraised shortly after your parent’s death, that appraisal would likely be far closer to the ultimate sale value of $275,000, and the capital gains exposure would be less.
Long-Term Options: There are three primary options for what to do with an inherited property. You can sell the house, rent the house, or live in the house. It’s also possible to disclaim the house and have it to pass to the next-in-line beneficiary. Disclaimers, however, are rare unless the first beneficiary is wealthy and wants the house to pass to someone else to minimize future estate taxes.
Selling the house is the most common choice, provided the real estate market is not in the doldrums. If you are in the middle of the probate proceeding, you will need the court’s permission before putting the house on the market. You do this in Vermont by making a Motion for License to Sell, which the court usually grants. If the probate process is over, the Decree of Distribution gets recorded with the town clerk, after which the beneficiaries named in the Decree may proceed with the sale. Whether to make
improvements is strictly a cost-benefit analysis. Most often it’s best to let the buyer update according to their tastes.
Renting a house can generate an attractive cash flow, particularly where the residence has no mortgage. If you have not been a landlord before, consider hiring a property management company. As importantly, consider creating a limited liability company (LLC) to hold the rental property. By placing the rental property in an LLC, you are limiting your liability to the value of the residence in the event
something terrible happens.
Moving into the house is the last option. If considering this, first get a home inspection to better understand what maintenance issues you have inherited and the expected costs of repairs. If you live in the house for two of the five years before selling it, in addition to getting the step-up in cost basis to the date of death value when you inherited it, you would also qualify for up to $250,000 of capital gains exclusion if you are single, or $500,000 of capital gains exclusion if you are married.
Other Common Issues: Lastly, a frequent issue with inherited houses is two or more siblings disagreeing about what to do with the house. One would prefer to sell it; the other to make it a vacation home or a primary residence. The easiest solution is for one sibling to buy out the other’s share of the house. This can be done with cash, by reallocating the inheritance so the sibling getting the house gets a smaller portion of the other assets, or by one sibling providing the other a promissory note and deed. If the latter, put the agreement on paper and treat it like a bank mortgage. Another option is to treat the property as a rental, with one sibling paying rent to the LLC that holds the property. The LLC then dictates how the income gets distributed to the siblings. Lastly, if the siblings cannot agree, one can seek a partition action in court. This results in the sale of the home, with the proceeds being split among the siblings proportionate to their interests.