KEEP IT CIVIL: Attorney Carey Messina, of Kean Miller, says there can never been enough communication between heirs when dealing with an inherited house. (Photo by Don Kadair)
So you’ve just been named an estate executor, given the difficult and delicate responsibility of balancing family needs with the most financially efficient options during an already emotionally charged time. Or perhaps you just lost a parent who has left you and your siblings with their home. Where do you start?
Riddled with constant decision-making and potentially unforeseen hangups, handling an estate can be a daunting task. So what should you do? To better gauge key issues Baton Rouge residents might face when inheriting a house, Business Report talked with three estate attorneys—Carey Messina of Kean Miller, and Trevor Wilson and Miriam Henry of Jones Walker—about some of the most common issues they see among clients as well as the most effective solutions to those issues.
SECURING THE PREMISES
After a parent dies, an executor’s immediate concerns might revolve around the safety of the house. One of the first questions an heir might ask: Is there a security company involved that has a contract for monitoring? If so, Messina suggests contacting the company to see what numbers they would call in the event of a security breach as well as determining different security passwords. Often times, heirs, after consulting with each other, will also change the locks on the house, as there’s no telling who all has been given keys to the home over the years. Siblings might want to place valuable items in safety deposit boxes or remove them from the house as soon as possible, Messina says.
The key to this entire process among heirs, he says, is “communication, communication, communication.” Regularly updating the other parties involved reduces the risk of misunderstanding, mistrust and frustration among family members.
“There are a number of ways you can work through keeping your favorite family gathering place intact so you can continue to use it.”
MIRIAM HENRY, attorney, Jones Walker
KEEP, RENT OR SELL?
Competing interests among siblings could make this the most challenging decision after inheriting a house. While a house may have sentimental value to the heirs, the executor must remain objective about the situation. Most of the time, reducing the house to liquid assets, selling and divvying it up evenly makes the most financial sense.
“Don’t beat yourself up over it too much,” Henry says. “It’s expensive to maintain a house in an estate, and insurance coverage and court proceedings can also be expensive.”
One thing to keep in mind before selling, says Henry, is coming to an up-front agreement on terms of the sale. This is better handled on the front-end when drafting an estate plan, as disagreements among siblings can occasionally lead to costly and lengthy court proceedings.
READY FOR A PROPERTY INVESTMENT?
Heirs might elect to keep a house, especially if it’s a recreational property such as a beach house or camp. In this case, who will the children appoint to be the manager? Is it going to be a family member, or are they going to hire a management company to rent out the property and collect the funds for them? The last thing you want is a piece of real estate that’s owned by more than one person, Wilson says.
The best way to mitigate this is to establish a limited liability company, or LLC, with the other heirs. This provides heirs with a more concrete, corporate management structure while allowing for more flexibility. Henry suggests putting a year’s worth of expenses into the LLC and writing an agreement between heirs that details everything from who’s in charge if a dishwasher breaks to the parameters for renting the property.
“Maybe everybody gets two weeks a year to use the property and the rest of the time it’s available to be rented,” Henry says. “There are a number of ways you can work through keeping your favorite family gathering place intact so you can continue to use it.”
“The sooner you can sell it and the closer to the time of death it was, the less likely you are to have to pay taxes and worry about what the value was at the date of death.”
TREVOR WILSON, attorney, Jones Walker
Inherited assets get a new tax basis, known as the date-of-death value. To get the most out of your federal income tax, find a qualified real estate appraiser to value the property. Beneficiaries need to know the house’s most recent value to calculate capital gains tax later, when they sell assets.
“If mom bought the home for $200,000, but it’s now worth $300,000 at the date of death, you want to value the home at $300,000,” says Messina. “That way, you have zero income tax gain if you sell the home for $300,000.” He warns against undervaluing real estate; otherwise, based on the aforementioned scenario, you could end up with a $100,000 federal income tax gain.
“The sooner you can sell it and the closer to the time of death it was,” Wilson says, “the less likely you are to have to pay taxes and worry about what the value was at the date of death.”
That being said, it’s best to not jump the gun and sell the property before the homeowner dies; if that property has appreciated dramatically, you can end up paying more capital gains tax than if you would have waited, Henry says. Check with your accountant beforehand to ensure you’re not triggering a tax you might not have otherwise had to pay.
THERE’S ALWAYS OTHER EXPENSES
If the house has an existing mortgage, the estate might settle it. But owning a home can still be expensive.
“Sometimes, insurance costs can be higher for co-owned pieces of property that are residencies if you keep the property long-term,” Henry says. A executor might want to contact the insurance agent for the home to double-check that under the policy the coverage will continue even if the house is unoccupied, Messina adds.
Regardless of whether you decide to sell or keep the house, take a look in the deceased’s checkbook and find out where their bills were being sent—Utilities? Yard maintenance? Cable? Electric?—and determine if you want to continue these services.
The attorneys suggest setting aside some money to pay these generally monthly expenses, keeping in mind that the account may need to be replenished, depending on how long the property is kept.