King & Wood, P.A.

What Happens If You Inherit a Parent’s House?

“Inheriting a house is a process that should begin well before a parent dies. While discussing end-of-life topics can be uncomfortable, the conversations must happen before it’s too late.”

Inheriting your parent’s home is a combination of sadness, relief, and worry. The last one can be avoided if the right planning is done in advance, says a recent article, “6 lessons I learned from inheriting a parent’ s house” from Bankrate. When all these feelings are combined with navigating the inheritance among siblings, things can get complicated quickly.

Many people think children automatically inherit a house when their parents die, but this isn’t true. It’s possible for children to inherit without a will, but it doesn’t always happen. Every state has its own laws about who inherits what in the absence of a will. Without a will, there will be unpleasant surprises for the family.

Parents need to talk with their children to tell them if they have a will or estate plan and where the will can be found. If there is no will, the parents must meet with an estate planning attorney as soon as possible to ensure their wishes are documented.

Wills and estate plans are never completely done. Wills need to be updated as circumstances change over time. A will created while a parent is in their 50s may not reflect the family's status ten years later. Let’s say one sibling is disabled and receives means-tested government benefits. If the sibling is left something in the will, their benefits could be cut off. If the sibling was well ten years ago, the estate plan didn’t include a special needs trust, which would allow the family to provide for the disabled sibling without putting their benefits at risk.

The general rule for reviewing wills is to review wills every three to five years. They may not always need updating, but they definitely need reviewing.

Heirs need to put everything in writing if they have been left assets like the family home as a group. Siblings will have different lives and needs, so inheritances need to be clarified and documented. A verbal agreement is asking for trouble, even in the best of circumstances. If something happens to a sibling and their spouse has a different idea of what they want to happen to their share of the house, for instance, the way forward won’t be pleasant.

It's best to plan how your assets should be managed after death. Would a revocable trust work better to keep the family home out of probate? If the home is placed in a revocable trust upon the death of the owner, the ownership of the home goes to a trustee, avoiding probate.

Plan ahead and expect surprises. Inheriting a home isn’t great for every family, as it comes with costs. Property taxes, maintenance, and utility costs might make home ownership a burden rather than a blessing. Parents need to think carefully about whether or not inheriting the home will work for the family.

Consulting with an estate planning attorney in advance can facilitate a discussion about how best to pass the family home onto the next generation or determine it’s not in everyone’s best interests. Leaving a legacy of careful planning is as much a gift to the family as the home itself.

Reference: Bankrate (May 3, 2024) “6 lessons I learned from inheriting a parent’ s house”

Does Your State Have an Inheritance Tax?

“How much will your children—or other heirs—pay when you die? That depends on whether you live in a state with no death tax.”

Most Americans aren’t concerned with the $12.92 million threshold for the federal estate tax. However, some states are not as generous with estate tax exemptions, and others impose inheritance taxes on heirs, reports the article “States That Won’t Tax Your Death” from Kiplinger. State death taxes can become expensive for loved ones.

Death taxes are tax liabilities incurred by heirs when you die. In some states, heirs pay death taxes on even small inheritances. For example, heirs in Nebraska pay a death tax rate of 15% on inheritances over $25,000. The good news is that if you live in a state with no estate or inheritance tax, you don’t have to worry about a state death tax.

If taxes are a big consideration for where you live, consider the pros and cons before making any big decisions. Not every state is as tax-friendly regarding other taxes, fees, or the overall cost of living.

• Alabama has no death taxes and low grocery taxes.
• Alaska has no death taxes, and Alaska pays residents to live in the state through the Permanent Fund Dividend. In 2023, the payment was $1,312.
• Arizona has no death tax, low-income taxes and a flat income rate of 2.5%.
• Arkansas has no estate or death taxes, and a recent tax cut bill reduced income taxes.
• California is generally a high-tax state with high costs of living, but there is no death tax.
• Colorado has no death tax and the highest EV credit of any state.
• Delaware is known to be very business friendly. However, it’s also a state with no sales tax, no state estate tax and no inheritance tax.
• Florida has no death taxes, and what appeals to many new arrivals is no state income tax.
• Georgia has no estate or inheritance tax.
• Idaho doesn’t have an inheritance tax, but some types of retirement income, including pensions, are taxable.
• Indiana has no inheritance tax and a fairly low flat-income tax rate of 3.15% (although some counties impose income taxes of their own).
• Kansas has no inheritance tax or estate tax.
• Louisiana has no death taxes and some of the lowest property taxes in the country.
• Michigan has no estate tax or inheritance tax.
• Mississippi taxes groceries but has no death tax or estate tax.
• Missouri has no state death tax.
• Montana has no state death tax.
• Nevada has no inheritance taxes and no income tax.
• New Hampshire doesn’t have a death tax, and there’s no personal income tax, but there is a tax on interest in dividends.
• New Mexico has no estate or inheritance tax.
• North Carolina has no death taxes and low property taxes.
• North Dakota has no estate or inheritance tax, and the highest income tax rate is 2.5%.
• Ohio has no death taxes but does have high property taxes.
• Oklahoma has no death tax; low property and income tax rates never reach 5%.
• South Carolina has no death tax or inheritance tax.
• South Dakota has no inheritance tax and no state income taxes.
• Tennessee has no estate, inheritance, or income tax.
• Texas has no income tax and no inheritance tax.
• Utah has no death tax but is one of 11 states that taxes Social Security retirement benefits.
• Virginia has high income tax rates but no inheritance or state estate taxes.
• West Virginia has no death tax.
• Wisconsin has no death or state estate taxes. However, property and income tax rates are high.
• Kiplinger ranks Wyoming as one of the best states for middle-class families because of the state’s overall low tax burden. There’s also no inheritance tax.

Reference: Kiplinger (Oct. 12, 2023) “States That Won’t Tax Your Death”

Should You Consider a Reverse Mortgage?

“Many of the negatives have been addressed with federal insurance and oversight. At the least, they’re worth considering for people who are cash poor and house rich.”

A loan of last resort for many years has gotten an upgrade. Stories of borrowers who faced foreclosure and surviving spouses evicted from their own homes are decreasing, as the new reverse mortgage often does what they were originally intended to do: provide financial help for retired homeowners who want to stay in their homes.

Home equity conversion mortgages (HECMs) are insured by the Federal Housing Administration and overseen by the Department of Housing and Urban development, explains a recent article from The Wall Street Journal titled “The New Math of Reverse Mortgages for Retirees.” There are limits on how much borrowers can take, so seniors don’t have the option to take wildly inappropriate large lump sums. There are protections from defaults if the house value sinks to less than the loan amount and provisions to protect a surviving spouse’s right to stay in the home after the death of the borrower.

HECMs are a tiny part of the financing options available to seniors who need to take equity from their homes in later years. Some downsides to the reverse mortgage remain, particularly the high upfront fees. However, the reverse mortgage burden is mainly on heirs, who will not inherit the equity or the home, unless they want to pay back the loan.

For seniors who are concerned about outliving their savings and want to stay at home until the very end of life, a reverse mortgage may be a worthwhile strategy. The cash can be a way to pay for long-term care and other unexpected expenses.

Another benefit: disbursed funds aren’t taxed, since they are considered a loan advance. Distributions from traditional IRAs and 401(k)s are taxed as ordinary income.

According to a trade association, HECMs make up 95% of the reverse mortgage market. There are about 580,000 totaling about $113.5 billion. However, a 2019 study from the Brookings Institute found less than 2% of homeowners age 62 and older hold a reverse mortgage of any kind.

A simplified version of how it works: to qualify for an HECM, borrowers must be age 62 and older, owners and occupants of the home and have the financial ability to maintain the home, including paying property taxes, insurance, and if relevant, homeowner association fees.

HECMs must be obtained through an approved FHA-approved lender and borrowers must buy FHA mortgage insurance and attend an information session with an HUD-counselor. The amount to borrow is determined by the appraised property value, how much is owed on the primary mortgage, the borrower’s age and current interest rates.

The borrower has an option of a payment plan with an adjustable interest rate or a fixed rate. If they choose the fixed rate, they must take the lump-sum disbursement option. This decision may have an impact on eligibility for government benefits, so it needs to be discussed with an elder law attorney.

For the adjustable interest rate, disbursements are made at will and the untouched amount can continue to grow at the variable interest rate. The loan is received as a line of credit, letting the borrower take distributions as needed or as “tenure,” monthly payments for the life of the loan. Other options include monthly payments for another specified term or a combination of these options. Depending on the loan, the recipient can change their payment plan to other options at any time, as long as funds are available.

The risk to the lump-sum payment is simple. In the past, seniors took out lump-sum payments, spent the money quickly and then were without funds to pay household expenses, like insurance and property tax.

Today’s HECM attempts to reduce this risk by limiting the amount to be borrowed. The FHA also performs assessments of loan applicants. Ultimately, the homeowner must use the funds well and wisely to serve their intended purpose.

Reference: The Wall Street Journal (June 3, 2022) “The New Math of Reverse Mortgages for Retirees”

How Do You Gift Your House to Your Children during Your Lifetime?

“There are many ways to pass property on to children, including gifting the family home to them while you are still alive, bequeathing it to the children upon your passing, or selling the residence to your heirs.”

Whether you have a split level or a log cabin, your estate plan should be considered when passing property along to the next generation. How you structure the transaction has legal and tax implications, explains the article “How estate planning can help you pass down a house to your kids and give them a financial leg up” from USA Today.

For one family, which had been rental property landlords for more than two decades, parents set up a revocable trust and directed the trustee to be responsible for liquidating houses only when they became vacant, otherwise maintaining them as rental properties as long as tenants were in good standing. They did this when the wife was pregnant with their first child, with the goal to maximize the value to their children as beneficiaries. This was a long-term strategy.

Taxes must always be considered. When a home or any capital asset is given to children while the parents are alive, there may be a capital gains tax issue. It’s possible for the carryover cost basis to lead to a big cost. However, using a revocable trust avoids probate and gives them a step-up in basis to avoid capital gains taxes.

Many families use a traditional method: gifting the house to the children. The parents retain the ownership and benefit of the property during their lifetimes. When the last parent dies, the children get the home and the benefit of the stepped-up basis. However, many estate planning attorneys prefer to have a house pass to the next generation through a revocable trust. It not only avoids probate but having a trust allows the parents to dictate exactly what is to be done with the house. For example, the trust can be used to direct what happens if only one child wants the house. The one who wants the house can have it, but not without buying out the other children’s’ shares.

If the children are added onto the deed of the house, keep in mind whoever is added to the deed has all the rights and liabilities of an owner. If one child wants to live in the home and the others don’t, the others won’t be able to sell the house. The revocable trust mentioned above provides more control.

Selling the family home to an adult child may work, especially if the parents cannot afford to maintain the home and the child can. However, there are pitfalls here, since the parents lose control of the home. An alternative might be to deed the property to the children, have the children refinance the property and cash the parents out.

If parents sell the home below fair market value, they are giving up proceeds to finance their retirement. If they don’t need the money, great, but if not, this is a bad financial move. There are also taxable gains consequences, if the home is sold for more than they paid. A home’s sale might result in a dramatic increase in property taxes to the buyer.

However you decide to pass the family home or other real estate property to children, the transfer needs to be aligned with the rest of your estate plan to avoid any unexpected costs or complications. Your estate planning attorney will be able to help determine the best way to do this, for now and for the future.

Reference: USA Today (Dec. 3, 2021) “How estate planning can help you pass down a house to your kids and give them a financial leg up”

What is not Covered by a Will?

“While a will is one of the most important estate planning documents you can have, there are things that a will won’t cover.”

A last will and testament is one part of a holistic estate plan used to direct the distribution of property after a person has died. A recent article titled “What you can’t do with a will” from Ponte Vedra Recorder explains how wills work, and the types of property not distributed through a will.

Wills are used to inform the probate court regarding your choice of guardians for any minor children and the executor of your estate. Without a will, both of those decisions will be made by the court. It’s better to make those decisions yourself and to make them legally binding with a will.

Lacking a will, an estate will be distributed according to the laws of the state, which creates extra expenses and sometimes, leads to life-long fights between family members.

Property distributed through a will necessarily must be processed through a probate, a formal process involving a court. However, some assets do not pass through probate. Here’s how non-probate assets are distributed:

Jointly Held Property. When one of the “joint tenants” dies, their interest in the property ends and the other joint tenant owns the entire property.

Property in Trust. Assets owned by a trust pass to the beneficiaries under the terms of the trust, with the guidance of the trustee.

Life Insurance. Proceeds from life insurance policies are distributed directly to the named beneficiaries. Whatever a will says about life insurance proceeds does not matter—the beneficiary designation is what controls this distribution, unless there is no beneficiary designated.

Retirement Accounts. IRAs, 401(k) and similar assets pass to named beneficiaries. In most cases, under federal law, the surviving spouse is the automatic beneficiary of a 401(k), although there are always exceptions. The owner of an IRA may name a preferred beneficiary.

Transfer on Death (TOD) Accounts. Some investment accounts have the ability to name a designated beneficiary who receives the assets upon the death of the original owner. They transfer outside of probate.

Here are some things that should NOT be included in your will:

Funeral instructions might not be read until days or even weeks after death. Create a separate letter of instructions and make sure family members know where it is.

Provisions for a special needs family member need to be made separately from a will. A special needs trust is used to ensure that the family member can inherit assets but does not become ineligible for government benefits. Talk to an elder law estate planning attorney about how this is best handled.

Conditions on gifts should not be addressed in a will. Certain conditions are not permitted by law. If you want to control how and when assets are distributed, you want to create a trust. The trust can set conditions, like reaching a certain age or being fully employed, etc., for a trustee to release funds.

Reference: Ponte Vedra Recorder (April 15, 2021) “What you can’t do with a will”

Trusts can Work for ‘Regular’ People

“When you hear the word trust fund, you might think of the uber-wealthy giving their kids a big chunk of cash on their 25th birthday. However, trust funds aren’t just for the rich.”

A trust fund is an estate planning tool that can be used by anyone who wishes to pass their property to individuals, family members or nonprofits. They are used by wealthy people because they solve a number of wealth transfer problems and are equally applicable to people who aren’t mega-rich, explains this recent article from Forbes titled “Trust Funds: They’re Not Just For The Wealthy.”

A trust is a legal entity in the same way that a corporation is a legal entity. A trust is used in estate planning to own assets, as instructed by the terms of the trust. Terms commonly used in discussing trusts include:

• Grantor—the person who creates the trust and places assets into the trust.
• Beneficiary—the person or organization who will receive the assets, as directed by the trust documents.
• Trustee—the person who ensures that the assets in the trust are properly managed and distributed to beneficiaries.

Trusts may contain a variety of property, from real estate to personal property, stocks, bonds and even entire businesses.

Certain assets should not be placed in a trust, and an estate planning attorney will know how and why to make these decisions. Retirement accounts and other accounts with named beneficiaries don’t need to be placed inside a trust, since the asset will go to the named beneficiaries upon death. They do not pass through probate, which is the process of the court validating the will and how assets are passed as directed by the will. However, there may be reasons to designate such accounts to pass to the trust and your attorney will advise you accordingly.

Assets are transferred into trusts in two main ways: the grantor transfers assets into the trust while living, often by retitling the asset, or by using their estate plan to stipulate that a trust will be created and retain certain assets upon their death.

Trusts are used extensively because they work. Some benefits of using a trust as part of an estate plan include:

Avoiding probate. Assets placed in a trust pass to beneficiaries outside of the probate process.

Protecting beneficiaries from themselves. Young adults may be legally able to inherit but that doesn’t mean they are capable of handling large amounts of money or property. Trusts can be structured to pass along assets at certain ages or when they reach particular milestones in life.

Protecting assets. Trusts can be created to protect inheritances for beneficiaries from creditors and divorces. A trust can be created to ensure a former spouse has no legal claim to the assets in the trust.

Tax liabilities. Transferring assets into an irrevocable trust means they are owned and controlled by the trust. For example, with a non-grantor irrevocable trust, the former owner of the assets does not pay taxes on assets in the trust during his or her life, and they are not part of the taxable estate upon death.

Caring for a Special Needs beneficiary. Disabled individuals who receive government benefits may lose those benefits, if they inherit directly. If you want to provide income to someone with special needs when you have passed, a Special Needs Trust (sometimes known as a Supplemental Needs trust) can be created. An experienced estate planning attorney will know how to do this properly.

Reference: Forbes (March 15, 2021) “Trust Funds: They’re Not Just For The Wealthy”

What’s the Senior Freeze?

 

 

“Does a person remain eligible for the Senior Freeze, if she conveys her house to her children, but keeps a life estate reservation on the property?”

Many states and counties have what is known as a “Senior Freeze” program. This program reimburses eligible senior citizens and disabled persons for property tax or mobile home park site fee increases on their principal residence. To qualify, a senior must meet all the eligibility requirements for each year from the base year through the application year.

As far as property with a life estate, nj.com’s recent article, “Will I get the Senior Freeze if I have a life estate for my home?” explains that it’s important to determine who remains the owner of the property. The article says that the Senior Freeze program is a bit of a misnomer, because the benefit doesn’t actually “freeze” property taxes. The program actually reimburses eligible individuals for any property tax increases incurred, once an individual qualifies for the benefit.

An eligible person gets the difference between the property tax amount in the first year of eligibility—the “base year”—and the current year’s property tax amount, presuming it is higher. For example, in New Jersey, a person has to have two consecutive years of eligibility before applying and satisfy the following requirements:

• The applicant or his/her spouse are at least 65 or receiving Social Security disability benefits;
• The applicant lived in the state continuously since Dec. 31, 2007, or earlier, as a homeowner or renter;
• The applicant owned and lived in his/her home since Dec. 14, 2014 or earlier (and still owns and lives in the home);
• He or she has paid the full amount of the property taxes due; and
• The applicant meets the income limit (currently $89,013 in NJ).

The program typically doesn’t apply to vacation homes, second homes, rental properties, or properties that have more than four units.

It’s not uncommon for seniors to transfer a home to a trust for a variety of purposes including government benefit planning but conveying your home entirely may disqualify you from the Senior Freeze program. An applicant is considered the owner of the property, if she retains a life estate in the property, which must be evidenced in the deed or other legal document showing the applicant’s right to occupy the property.

The retention of a life estate will let an applicant qualify for the program if the other eligibility qualifications are met, but it could create collateral issues that risk qualification for government benefits if the property is sold. Therefore, it’s critical that you talk to a certified elder law attorney before transferring real estate or making substantial gifts.

Reference: nj.com (December 11, 2019) “Will I get the Senior Freeze if I have a life estate for my home?”