Ron Henderson - INHERITED - WILLS, TRUSTS AND REAL ESTATE : INHERITANCE STRATEGIES

INHERITED - WILLS, TRUSTS AND REAL ESTATE : INHERITANCE STRATEGIES

Ron Henderson

Table Of Contents

Property Inheritance: Wills Vs. Trusts Vs Revocable Transfer On Death Deed

Dealing With Inherited Homes: Best Practices For Families 7

Concepts To Know When Selling An Inherited Home

Distribution Among Family Members

Downsides To Inheriting

Probate - How Selling A House In An Estate Differs From Regular Home Sales

Determining The Value Of An Inherited Home 47

The Process And Options To Selling Inherited Homes

Inherited Home Sales & Taxes

10. Prepping An Older Home For Sale

11. Small Improvements Can Gain You Thousands 95

12. Marketing An Inherited Home

101

13. Using Curb Appeal Pictures And Video To Sell Your Inherited Home For More

105

14. Before The Inevitable: Forced To Sell The Home Before Parental Passing

119

Foreword To quote Benjamin Franklin, "In this world, nothing can be certain, except death and taxes." When dealing with real estate and inheritance, you're grappling with those inevitable elements and a whole lot more. After four decades of navigating estates, economic cycles, foreclosures, and intricate real estate transactions as a seasoned Real Estate Broker and Loan Officer, you acquire a wealth of knowledge. This book is a vessel through which to pass on some of that wisdom. In the world of real estate, where properties stand as pillars of wealth, investment, and security, there exists a realm less explored but profoundly essential: the realm of trusts and estate planning. It's a domain that, to the uninitiated, may seem like a labyrinth of legal intricacies and financial complexities. However, within this intricate tapestry lies a potent tool capable of safeguarding and enhancing the legacy of real estate for generations to come. One of the most prevalent issues individuals encounter concerning real estate and estates is the absence of a comprehensive plan. Without a clear roadmap for the future, your real estate assets could become ensnared in a web of legal complications and unintended consequences. Likewise, without clear guidelines and open communication, conflicts may arise, leading to protracted legal battles and strained relationships. This book seeks to address these concerns by equipping you with the knowledge and tools necessary to craft a strategic plan that aligns with your goals and safeguards your assets.

By comprehending the strategies outlined in this book, you and

your beneficiaries can take proactive steps to mitigate the impact of probate and ensure a seamless transition of your real estate assets to those you hold dear.

DISCLAIMER

This book serves as a valuable overview of the essential aspects of estate settlement and considerations related to real estate. It is intended solely for educational purposes. The content of this book is based on information available at the time of writing, but it's crucial to acknowledge that local and federal laws, as well as tax codes, are dynamic and continually evolving. Every estate scenario is unique, and the complexities of real estate and estate planning demand specialized expertise. Therefore, it is strongly advised to seek the guidance of qualified attorneys, and Certified Public Accountants (CPAs) when dealing with these matters. The information in this book does not constitute legal or financial advice tailored to your specific circumstances. Consult with professionals who can offer personalized guidance based on the latest laws and regulations. Ron Henderson and Multi Real Estate Services can be a valuable resource for individuals dealing with real estate matters in the Los Angeles and Ventura County regions.

Sincerely,

Ron Henderson GRI, SRES, SFR, RECS, CIAS, CREN, GREEN President/Broker Multi Real Estate Services, Inc Direct 818-999-3981

Cell 818-515-9983 Fax 818-883-2089

Email ronh@mres.com www.mres.com DRE #00905793 NMLS #310358

vii

About Ron Henderson on Henderson Multi Real Estat eal Estate Services e Services

Ron Henderson is a San Fernando Valley native and has been a licensed real estate broker since 1985. He is President of Multi Real Estate Services, Inc Los Angeles, California.

MRES was opened in 1995 as a one-stop real estate company, helping clients in all facets of real estate consultation, acquisition, liquidation, or financing. Ron is a Graduate of Realtors Institute (GRI) , Certified

Real Estate Negotiator (CREN), Certified Investor Agent Specialist (CIAS), Short Sales and Foreclosure Resource (SFR), Real Estate Cyberspace Specialist (RECS), Seniors Real Estate Specialist (SRES), GREEN Designation and was the corporate property specialist in charge of corporate relocation and foreclosure services for the nation’s largest real estate company. Ron has won numerous awards for real estate sales and achievements a multi-million dollar producer and was named a Los Angeles Super-Agent for 2005 by Los Angeles Magazine & Key Professional Media.| Ron originated mortgage loans as a loan broker since 1989 and is well versed in the constantly changing lender loan programs and underwriting guidelines. As a Wholesale Account Representative for a subprime mortgage lender in the 1990’s, Ron acquired hands-on experience in the “backend” workings of the mortgage origination and secondary (Mortgage-Backed Security) market. ix

As an expert and seminar speaker in subjects such as the 1031 Tax Deferred Exchanges, HUD 203(k) Rehabilitation Home Loans, PACTrusts, Credit Scoring, Advanced Purchasing, and Financing Techniques, and Regulations Applicable to Real Estate and Mortgages, Ron can provide valuable information to real estate professionals, and the general population. Ron has acted as a consultant to the Investor’s Business Daily, Los Angeles Times and Daily News for San Fernando Valley real estate issues.

Ron was the state Government Affairs Chair for the California Association of Mortgage Professionals (2017-2018), is on the Gov’t Affairs Committee for the Southland Regional

Association of Realtors, and on the Gov’t Affairs Committee for the National Association of Mortgage Professionals dealing with state and federal representatives in Sacramento and Washington DC on real estate and finance regulations and policies. Ron is the Chairman of the Outwest Real Estate Education Meeting, training realtors, loan officers and affiliated business education and financial education in the West San Fernando Valley.

Multi Real Estate Services, Inc Calif. Dept. of Real Estate #00905793 NMLS #310358

CHAPTER 1 Property Inheritance: Wills vs. Trusts vs Revocable Transfer on Death Deed In the world of real estate, one significant aspect that often comes into play is property inheritance. It's a topic that touches the lives of many individuals, whether you're a property owner considering how to pass on your assets or a prospective heir wondering about the best way to receive an inheritance. In this chapter, we will delve into the intricacies of inheriting property, comparing two primary methods: through a last will and testament (a will) or a trust. Each method has its own set of procedures, implications, and considerations. By understanding the differences, you can make informed decisions that align with your unique circumstances and goals.

THE LAST WILL AND TES T WILL AND TESTAMENT (WILL) AMENT (WILL)

A will is a legal document that allows an individual, referred to as the testator, to specify how their assets, including real estate, should be distributed after their passing. Let's explore the key aspects of property inheritance through a will: Probate Process: Property transferred through a will typically goes through the probate process. Probate is a court-supervised procedure that verifies the validity of the will and ensures that the testator's wishes are carried out. While probate provides oversight and legal protection, it can be a time-consuming and potentially costly process.

Public Record: One important consideration is that the details of a will, including property distribution and the names of beneficiaries, become part of the public record during probate. This means that anyone can access this information, which may not align with your privacy preferences. Control: Although a will allows the testator to outline how assets should be distributed, it is subject to the probate court's oversight. The court will ensure that the instructions in the will are followed, which can provide a level of assurance but may limit flexibility. Timing: Probate can be a lengthy process, potentially taking several months or even years before beneficiaries receive their inheritances. This delay can be a significant concern for those who wish to expedite the transfer of property.

THE TRUST

A trust, on the other hand, is a legal arrangement where the property owner, known as the grantor or settlor, transfers

property into a trust during their lifetime. The trust document outlines how the property should be managed and distributed, typically naming beneficiaries and a trustee to oversee the process. Here are the key aspects of property inheritance through a trust: Avoiding Probate: One of the primary advantages of using a trust is that property held within the trust generally avoids probate. This means that the trust assets can be distributed more quickly and efficiently after the grantor's death, often within weeks or months, depending on the terms of the trust. Privacy: Trusts offer a higher level of privacy compared to wills. Unlike wills, the details of a trust, including property distribution, are not part of the public record. This added privacy can be especially appealing to those who value discretion. Control: Trusts provide greater flexibility and control over how assets are managed and distributed. The grantor can specify detailed instructions in the trust document, and the trustee must follow these instructions faithfully, ensuring that the grantor's wishes are honored. Timing: As mentioned earlier, property held in a trust can be distributed more quickly, reducing the waiting period for beneficiaries to receive their inheritances. Inheriting property is a significant aspect of real estate, and the choice between using a will or a trust can have a profound impact on the process. Your decision should be based on various factors, including the complexity of your estate, your privacy preferences, the potential for disputes among beneficiaries, and the laws in your jurisdiction. To make the best choice, it is crucial to consult with legal and financial professionals who can provide guidance tailored to your specific circumstances and

goals. Whether you are a property owner planning your estate or an heir anticipating an inheritance, understanding these methods of property transfer is essential for a smooth and efficient process.

REVOCABLE TRANSFER OF TRUST DEED

A California Revocable Transfer on Death (TOD) Deed, often referred to as a California Revocable Transfer of Trust or a California Beneficiary Deed, is a legal document used in the state of California to facilitate the transfer of real estate property to named beneficiaries upon the death of the property owner, without the need for probate. This instrument is commonly used as a part of estate planning to simplify the transfer of real property to heirs or beneficiaries while avoiding the lengthy and costly probate process. Here is an explanation of the key elements and concepts related to the California Revocable Transfer on Death (TOD) Deed: Revocable Nature The term "revocable" in the title indicates that the property owner (grantor) retains the right to change or revoke the transfer at any time during their lifetime. This means they can sell, mortgage, or change beneficiaries if they wish. Transfer on Death (TOD) A TOD Deed specifies that the transfer of the property's title to the named beneficiary will occur automatically upon the death of the property owner. This eliminates the need for probate court involvement, which can be time-consuming and expensive. Beneficiaries The property owner designates specific individuals or entities (beneficiaries) who will receive the property upon their death.

Multiple beneficiaries can be named, and they may receive the property in equal or designated shares. Grantor/Owner The person who currently owns the property and is creating the TOD Deed is referred to as the grantor or owner. They retain full ownership and control over the property during their lifetime. Property Description The TOD Deed must contain a clear and accurate description of the real estate property being transferred, including its legal description and address. Recorded Document To be valid, the TOD Deed must be properly executed, signed, and notarized, and it needs to be recorded with the county recorder's office where the property is located. Recording ensures that the transfer will take effect upon the grantor's death. Contingencies and Simultaneous Death The TOD Deed can include contingencies and instructions for what should happen if a beneficiary predeceases the property owner or if simultaneous deaths occur. Beneficiary's Rights and Liabilities Beneficiaries do not have any legal rights to the property during the grantor's lifetime. However, they have the right to claim the property and take title to it upon the grantor's death. Avoiding Probate One of the primary advantages of using a TOD Deed is that it bypasses the probate process, saving time and money for both the grantor's estate and beneficiaries.

Legal Requirements: It's crucial to follow California's legal requirements for TOD Deeds, as failure to comply with these requirements can result in the document being deemed invalid. Revocation and Amendment The grantor can revoke or amend the TOD Deed during their lifetime by executing a new TOD Deed or by using other legal methods specified under California law.

CHAPTER 2 Dealing with Inherited Homes: Best ed Homes: Best Practices for Families Dealing with an inherited home is a complex subject, and there are several complicated issues to resolve. A web search for “selling inherited property” returns more than 10 million results. A glance down the first page or two shows some of the issues: • Do You Pay Capital Gains Taxes on Property You Inherit? • What Taxes Are on an Inherited House? • If You Inherit a Home Do You Qualify for the $250,000 Home Sale Tax Exclusion? • What to Do When You Inherit Your Parent’s House, Home Inheritance Issues, and on and on. Additionally, it is not uncommon for a person selling an inherited home to have a sentimental attachment to the property, with the sale being the result of a recent death in the immediate family. This adds an emotionally overwhelming component to the transaction. Because of continuing property ownership obligations such as property taxes, insurance, utility bills, household and grounds maintenance—in addition to any issues with the settlement of the estate—a rapid sale is often necessary. Getting a loved one’s house ready for the market can be anxiety-provoking, emotional, and stressful. It likely includes clearing out once-treasured belongings and depersonalizing the rooms.

Then there is the financial cost of making necessary updates to attract buyers. Sometimes heirs must deal with liens or hidden problems in the house structure or systems (i.e., electric, plumbing, and gutters), and there may be disagreements among beneficiaries about the sale price, or whether to sell at all.

Family members drag their feet, distracted by images of growing up in the home, preventing them from taking appropriate action. They can’t let go. Everyone takes the time they need to deal with the passing of a loved one. Sellers in this situation need to take the appropriate steps to learn the market, educate themselves, and have a reliable real estate agent and tax attorney or Certified Public Accountant (CPA), an empathetic party who is there to help. This little book is meant to offer some proven tips that can help owners of inherited property approach the issue in a structured manner, with fewer problems and more satisfactory results for all stakeholders concerned. Here, we will discuss the different aspects of splitting the property with family members and the best practices involved.

BENEFITS OF SELLING

No matter if you are a single heir or one of multiple heirs to the property, selling it as quickly as possible will save money, time, stress, and the tiring effort involved in the settlement process. There are several benefits to selling the inherited property. For example, in some cases, along with inheriting property, the heirs end up inheriting unexpected commitments and difficulties with legal and financial implications. Every situation when someone inherits and then sells a home is typically different from each other. For example, if it is discovered there are environmental concerns or the mortgage is “underwater” (meaning the mortgage balance is more than the home is worth), heirs may even choose not to accept the home at all, allowing it to go into foreclosure. Those who do not want inherited property should consult a lawyer promptly, as disclaimer paperwork will likely have to be filed. Traditional home sales methods are a perfectly good option if you find that there are no outstanding mortgages and the property is in good shape and does not require major repairs or cleaning to sell. If you can easily afford any necessary repairs and cleaning while handling the selling process, then you can safely choose to sell an inherited property just as you would any other house. This is not to say that selling the property will always be complication-free, but even when issues arise, it may still be worth it to persist with the sale. When there are siblings or family members who share the property with you as legal heirs, there might be disagreement about how the settlement should proceed. Therefore, selling the property could save you the aggravation of dividing a singular property between many hands. Once the property is converted to money, the money can be more easily

distributed among the heirs. One concern that you do need to address is the amount of time required to sell the property, since it is uncertain when it may sell. A short sale of the home can come to your aid if the property has large loans against it where it's over encumbered relative to the property's value, and there are mortgage payments due which you are unwilling or unable to pay. If one or more heirs inheriting the property have an urgent need for cash, then a quick home sale is also a good option. Sometimes, you might receive some added tax benefits from selling the home, even at a loss. At times, you might also feel that you just want to get rid of the burdens an inherited home imposes by selling it quickly so you can get on with your life as smoothly as possible. A Short Sale requires skills from a seasoned real estate agent, and negotiating with existing lenders. If the property is in a different city or state, assuming the responsibility of maintaining a vacant house can be a burden that you may not be prepared to endure. If the house goes to probate, even if there are no residents, the property must be maintained. The property taxes, insurance premiums, utilities, homeowners association fees, and other ongoing costs must be paid by someone. Depending on how long the probate period lasts, families may need to pay for many months of maintenance, along with the legal fees and other expenses connected to owning and selling the property. At the end of the probate, depending on the market you may have to go through the effort and expenditure of repairing and selling the home. Under such conditions, if your benefits are lower than your commitments, it may be wisest to simply sell the home to investors.

DEALING WITH F G WITH FAMILY DYNAMICS AND MEMB CS AND MEMBERS

Having the property and the estate in a trust with specific trustees designated and how the estate will be handled and distributed can eliminate many family issues. Even when families have gotten along well in the past, when losing a loved one, emotions run high. Disputes among siblings or legal heirs over the settlement of inherited property are common. Often, disputes over a property are dominated by past issues of sibling rivalry and are a fight for dominance. In the absence of parental guidance, adult siblings are left to face the scenario of ambiguity or disagreements over their rightful role. It is essential that you work to ensure that disputes and disagreements do not lead to litigation. Litigation will only worsen the situation by causing issues with family members, and creating uncertainty and wasting time waiting for legal issues to be settled, as well as the usual expense and aggravation associated with legal hearings. The tremendous cost involved in litigation is certainly a wasteful expenditure. Litigation is not the 11

peacemaker’s choice—prevent it whenever you possibly can.

This situation can be avoided. By keeping the emotional heat down and a compromising frame of mind in the forefront, there is generally a solution that can be made for a peaceful settlement. Where creative solutions to these problems can be facilitated, there is mutual gain for all concerned. Look at the entire estate assets and negotiate an amicable distribution and division. If you inherit the home with your siblings the rule generally that ownership is to be evenly split unless otherwise stated in the will. If one of the siblings is interested in keeping it while the others want to sell it, the interested sibling can buy out the others using conventional financing. The cost involved in this process can be minimal and includes the appraiser’s fees and the closing costs. If this will work, you pay your siblings in cash for their shares and get the title of the property transferred into your sole name through a deed. It is recommended that estate assets be cleanly distributed. This will eliminate any carryover of potential disagreements. Alternatively, a private agreement can prove useful under some circumstances. For instance, if you or your sibling cannot qualify for a mortgage, the one who does not wish to keep the house can still personally finance the transaction. This will mean you will not need a conventional home loan or incur out of pocket expenses. For a private agreement, the acquiring member must make a promissory note to the other siblings for their share of the value as assessed by the appraisal. The amount due to him or her can be paid in monthly installments along with interest. With this

arrangement, you can buy out the property over time.

A specific term like 2,5 or 10 years may be viable for the aquiring member to pay off the members financing the property to be paid off from the sale of the property, or through a conventional refinance. It is recommended that a deed of trust be recorded against the property that grants the power to foreclose, if the buying member default on payments. Family is family, friends are friends, business is business. Document any and all agreements. The use of an attorney is advisable, especially in California, where you need to make sure all “Ts” are crossed. Renting the property could be the solution if none of the siblings are interested in keeping the property personally, but as a group the heirs see benefit in the house as rental or investment property. If you have a friendly relationship and can get along for a long period as co-owners of the property, you can rent out the property and take your share out of the proceeds monthly. If one of the siblings manages the collection of rental payments and arranges maintenance for the property, the effort can be rewarded by the others with an increased share. Whatever the terms are, though, it is advisable to record them in a written agreement to forestall future disagreements and conflict. Be aware of the potential ownership limitations renting a residential property in areas like Los Angeles where Rent Control and Just Cause Eviction laws are in place. It will limit your capability your ability to remove tenants and owner occupy or sale the property in the future. A lawsuit for partition should be the last resort for you to settle the inherited property if you cannot come to an amicable agreement with your sibling over the settlement. If it comes down to it, you can file a lawsuit asking the judge to order the sale of

the home and terminate your co-ownership. This is a complicated process and the judge usually appoints a mediator first, to get the property ready for sale. If you are at odds with each other, you and your siblings might not be able to do this. Therefore, you will need to have an agent sell the home and mediate between you. Sometimes, the best arrangement under these circumstances is still to sell the property, subtract the expenses and costs involved, and the commissions paid, and then divide the resulting amount among the beneficiaries. Selling the property as soon as you inherit also helps save on the capital gains tax.

STEPPED-UP TAX BASIS

The stepped-up tax basis of an inherited property is a crucial tax concept in the United States that affects how capital gains taxes are calculated when you sell an inherited asset, such as real estate or stocks. This concept can significantly benefit heirs

because it can reduce their potential tax liability. Here's an explanation of the stepped-up tax basis:

1. Tax Basis: The tax basis of an asset is essentially the value from which capital gains or losses are calculated for tax purposes when you sell the asset. The original

tax basis of an asset is typically its purchase price, plus any capital improvements made to it over time, minus any depreciation claimed (for certain assets like rental properties). 2. Inherited Property: When you inherit property from a deceased individual, such as real estate or investments, the IRS provides a special provision. The basis of the inherited property is "stepped up" to its fair market value (FMV) as of the date of the decedent's death (or an alternate valuation date, if applicable). This means that the new basis for tax purposes is not the original purchase price but the value of the asset at the time of inheritance. 3. Capital Gains: When you sell the inherited property, your capital gains or losses are calculated based on the stepped-up basis rather than the original cost. This can result in a substantial reduction in capital gains taxes because the difference between the FMV at the time of inheritance and the selling price may be much smaller than the difference between the original purchase price and the selling price. 4. Example: Let's say you inherit a house from your grandmother, and its FMV at the time of her death is $500,000. If you later sell the house for $550,000, you would only be subject to capital gains tax on the $50,000 difference between the FMV at the time of inheritance and the selling price. However, if the original purchase price of the house was $300,000, you would have had a much higher capital gain of $250,000 if not for the stepped-up basis. In essence, the stepped-up tax basis minimizes the potential capital gains tax liability for heirs and allows them to enjoy a more favorable tax treatment when selling inherited assets. This provision helps preserve family wealth and can be a significant

tax advantage for those who inherit property. It's essential to consult with a tax professional or estate attorney to understand the specific rules and implications of the stepped-up tax basis for your individual situation, as tax laws and regulations can change over time. If you were to sell the property shortly after the inheritance, since the difference between the sales price and stepped-up basis you may be left with nothing to pay in capital gains tax.

HOLDOVERS LIVING IN ESTATE

When inheriting a property, you might have to address the issue of holdovers living in the estate. If one of your siblings or yourself is living in the property, you need to come to an agreement with all the heirs regarding whether the concerned individual will continue to live there or will need to vacate. In the case of continuing to live there, the terms must be clearly drafted. If the right to remain there is mentioned in the will, then it cannot be challenged. If it has to be challenged for some reason, the necessary legal proceedings must be adhered to. If the decision is made to sell the property, then the property must be vacated in a definite timeline facilitating the sale. If the occupant wishes to continue residing in the property despite the sale, then it must be dealt with accordingly.

INHERITING WITH A TEN G WITH A TENANT OCCUPYING

If you are inheriting a property with tenants living in it, you must fulfill some responsibilities from the position of a landlord. If the property is sold, the legal rights of the tenants must be given due consideration. The Rent Control Laws are constantly changing and getting stricter, especially in Los Angeles. There are city, county and state laws, and there’s even a movement

towards federal laws. A whole book could be written on this subject. But by the time it was completed, it would be obsolete. For complicated situations like this, consult an attorney with specific background in local tenant landlord elements.

SPLITTING UP ITEMS INS G UP ITEMS INSIDE

Decisions pertaining to the settlement of the property or the division of its contents among the legal heirs must follow the guidance given in the will. Where there is no will enacted by the owner of the property, then the state’s laws regarding intestate succession will come into play. If either the will or the law requires the estate to be divided equally, the heirs must act accordingly. Sentimental objects are invaluable to those they are valuable to and settling them should happen out of the legal conventions in agreement between the siblings. Since the value of sentimental objects is often subjective and cannot be decided by an appraiser, the real challenge comes when more than one sibling wants the possession. Negotiation and compromise are called for. A real estate agent can be appointed to decide the value of properties. The challenge here may revolve around how to divide the real estate among the heirs in a way that is acceptable to all parties. The two main approaches that the siblings could take include either selling the property to divide the proceeds or keeping the property and sharing its use. If the estate also features assets that cannot be distributed on pro-rata basis, an equal division of value is the solution. If a sibling wants to hold the property, then the others can get cash equal to their share of the property or other assets as it may be decided. Ultimately, everyone involved in the deal walks away with his or her share of the property in the right proportion.

Dealing with the leftover items in the estate could be a laborious task and a bothersome job while attempting to settle a property. The use of a professional Organizer or Estate Sales company may be very valuable. In this situation, you might need to categorize the items as those to keep, those to sell, those to donate and those to throw away. Remember that during an estate sale, people may be ready to buy even the oddest things. What you may think is an antique, may just be old. What you think is junk, may have value. Therefore, make an effort to see that as many things as possible are sold or auctioned away to be converted into cash and distributed among the heirs.

CHAPTER 3 Concepts to Know When Selling An Inherited Home ed Home

There are a few legal concepts and other issues you should make sure you know about when selling an inherited home so that you can make informed decisions and avoid complications.

WILLS

Most houses that are inherited are passed at the owner’s death by the terms of that person’s “will.” A will is a person’s last chance to do whatever they wish with their property. It is a legal document with the authority to dictate the disposition of a person’s property at death and is very difficult to contest, no matter how apparently unreasonable its terms may be. Yes, someone of “testamentary capacity” (sound mind) really can leave a massive fortune to charity or a favored pet, bequeathing nothing to children or other relatives. Where the maker of the will is the sole owner of a home, that person enjoys complete rights to it (subject to liens or mortgages) and can draft the will in favor of legal heirs or anyone else he or she wants to inherit the property. An individual appointed to administrate the estate of a deceased person is the “executor.” The executor’s main duty is to carry out the instructions and wishes of the deceased. The executor is appointed either by the maker of the will or, in cases where there was no prior appointment, by a court. The executor will ensure that the transfer of titles happens as stated in the will.

The existence of a will concerning the estate makes the process of inheritance indisputable and smooth. If there is no will in place, then the established state laws that govern “intestate succession” (death without a will) will dictate the handling of property and, if needed, a court will intervene to settle issues. The word “probate” carries negative connotations with many people such that they work and plan to avoid it. However, probate does not have to be a difficult or drawn-out proceeding. Currently some 35 states allow simplified probate proceedings, called “common” or “informal” probate. The difference between common and “solemn form” probate begins when the executor submits the will to the court. For example, when an executor chooses to pursue common form probate in New Jersey, that executor can file the will at the court clerk’s office and fill out an application for appointment to the executor position. Will witnesses do not have to be present. Where the executor chooses to probate the will by solemn form, a legal complaint must be filed with the probate court, asking the court to open probate proceedings. Solemn form probate involves sending notice of the proceedings and a copy of the will to all the decedent’s heirs, whether mentioned in the will or not, as long as they would have inherited if he had died “intestate” (without a will). Common form probate does not require this step, although heirs can request a copy of the will from the executor. The solemn form probate notice includes a date for a court hearing in some states. All interested parties have the right to attend this hearing, where a judge will admit the will for probate if he or she determines it is valid and meets the legal requirements. With most estates, there is no reason for the executor to go through a solemn form probate if common form probate is an option. An executor generally chooses solemn form probate only

if she believes an heir or beneficiary might contest the will. Solemn form probate restricts heirs and beneficiaries from filing a will contest after a court-ordered date. Often, judges hear potential will challenges during the initial court date, when they decide if a will is valid. The will is either declared invalid, or is declared valid and can proceed through the rest of probate uncontested. In common form probate, heirs generally have years to decide if they want to contest the will, which can leave the estate in legal limbo. Even after the estate settles and closes, there remains the possibility that an heir might file a contest to reopen it again. For example, Georgia allows heirs four years in which to contest a will probated by common form. Beneficiary distributions made through common form probate are not final until the challenge deadline passes (up to four years). This means a beneficiary can receive an inheritance, only to have no choice but to return it to the estate years later if another heir successfully challenges the will. With cash inheritances, the money could easily be long gone by that point. Real estate and tangible assets might fall into disrepair. Executors generally will not risk this and will ask the beneficiary to sign a binding agreement to return the inheritance to the estate if necessary, or request solemn form probate. If the executor mentioned in the will is unable or unwilling to serve, then an appendix will be created to appoint the new executor. However, before the appointment of the administrator, there should be a declination letter from the executor (if he or she is still living and not incapacitated). In this event, the executor can be selected by a majority of the beneficiaries. For the sake of minors or incapacitated heirs, the court appoints a guardian ad litem, which is just a fancy way of saying someone to look out for the interests of the minor

heirs. Probate is not required when there is no property to be divided under the terms of the will and testamentary letters are not necessary to take control of assets in that case. It is essential to file the will of the deceased with the probate court. Unlike bank accounts, real estate properties will not automatically pass on to a surviving co-owner. To transfer the title of an automobile, probate is not needed, but real estate transfers require it. In the absence of a will that names an executor, state law will list people who can legally discharge the responsibility. If there is a necessity for a probate court proceeding, then the court will choose the administrator based on a priority list. The “intestate succession” laws vary between states as to what happens to a deceased person’s property who dies without enacting a valid will. If the deceased person was married, the surviving spouse will get the largest share of the estate. In cases where there were no children, the surviving spouse inherits the entirety of the property. The laws of every state dictate how children and other heirs inherit the property differently, though, and will need to be studied to make sure you fully understand the state laws that will be affecting you and your property.

TAXES

While the authors of a will pass on their property with the best of intentions, inheritors often must spend a great deal of money, effort, and time if they want to keep that property. The tax burdens accompanying inherited property are frequently a matter of concern and confusion. When inheriting a home, you need to know what kinds of taxes are attached to the home and what your obligations are. Note that tax laws significantly differ from state to state, so you should make sure to understand the inheritance tax laws of your state. For simplicity, the broad categories of taxes applicable to inheritance are roughly summarized here: Estate Tax: The estate tax in the United States is a tax on the transfer of the estate of a deceased person. The tax applies to property that is transferred via a will or according to state laws of intestacy. Other transfers that are subject to the tax can include those made through an intestate estate or trust, or the payment of certain life insurance benefits or financial account sums to beneficiaries.

According to the IRS, the estate tax is one part of the Unified Gift and Estate Tax system in the United States. The other part of the system, the gift tax, applies to transfers of property during a person’s life. In addition to the federal estate tax, many states have enacted similar taxes of their own. These taxes may be termed an “inheritance tax.” If an asset is left to a spouse or a federally recognized charity, the tax usually does not apply. In addition, a maximum amount, varying year by year, can be given by an individual, before and/or upon their death, without incurring federal gift or estate taxes: $11.2 million for married couples (and half that for an individual). The annual gift exclusion amount is $16,000 for 2022. • Inheritance Tax: Heirs pay federal inheritance tax on the net worth of their inheritance. The net worth is the gross value less certain deductions, a mortgage that must be paid off on an inherited house, for instance, or a marital deduction for property inherited by a spouse. If the result is more than the IRS exempt amount for a given year, the heir must pay an inheritance tax at the federal income- tax rate for the non-exempt amount. • Property Tax: Heirs may have to pay property taxes as soon as they inherit real estate and will pay them for as long as they own the house. Many states cap how much the assessed property value can rise from year to year, but when someone buys or inherits real estate, it will be reassessed at current market value. Even if subsequent assessments are capped, the initial reassessment can result in heirs paying thousands of dollars more in taxes than the previous owner. Some states offer an exemption; California state law, for instance, says that if the heir is the spouse or child of the owner, there is no reassessment. • Capital Gains Tax: Capital Gains taxes are applicable

when you decide to sell your inherited home for the fair market value or more. This means that you will have to pay taxes on your profits from the sale of the property. This is assessed based on how much you sell the property for and what the value of the property was when you inherited it. Generally, you will not be required to pay any capital gains tax if you sell the property immediately after inheriting it, since the property value will not have had time to increase. • Reporting the Inheritance: It is necessary for the executor of the estate to report the inherited property by filing an estate tax return. The “cost basis” (which we will talk about more later in the book) of an inherited home is decided based on when you inherited the property. In most cases, the basis for an inherited home is the market value of the property on the date when the deceased person died. • Reporting the Sale: When selling an inherited home, you are expected to report the sale on your income tax. Subtract the amount you received from the sale from the base amount to calculate whether you gained or lost from the deal and report it on the IRS Schedule D form. You will also need to copy the gain or loss figure over to your 1040 tax return form.

NAME ON PROPERTY

When you inherit personal property, the process is simple and the procedure is straight-forward. The will or the court’s decision may be enough to directly transfer the property to you.

In the case of inheriting real estate, things can be a bit more

complicated. This is because the titling document showing ownership of the property must be modified to state that you are the new owner. Generally, in this case, the executor of the will or the administrator nominated by the probate court will issue a new deed that names you as the owner of the property. The documents you will need in this regard include the death certificate and probated will of the previous owner, if available. You must consult the original deed of the property to confirm that the property was not owned jointly at the time of the death of the deceased. If the property is/was owned jointly, then the surviving owner inherits the property in full. Therefore, you will have to confirm whether you can inherit it by reading the death certificate and determining the order of inheritance. If the person that you inherit the property from has died first and left behind a co-owner, then the property would revert back to the other owner, leaving you to establish your claim as the legal heir to the property. If the will lists you as the inheritor, then you will require an executor’s deed. If the inheritance is facilitated by the court in the absence of a will, then you must present an administrator’s deed. Both kinds of deeds must describe the property legally and mention your name as the new owner. Along with the administrator who issued the deed, you need to sign the new deed in the presence of a notary public. If needed, you must also be able to produce a copy of the probated will as part of making the deed.

LIFE ESTATES

According to its legal definition, “life estate” is not ownership, but the right to use or occupy real property for one’s life. Often this is given to a person (such as a family member) by deed or as a gift

under a will with the idea that a younger person will then take the property upon the death of the one who receives the life estate. Title may also return to the person giving or deeding the property or to his/her surviving children or descendants upon the death of the life tenant—this is called “reversion.” Examples of creation of a life estate include, “I grant to Sally Smith the right to live in said real property until her death,” or, “I give my daughter, Sadie Smith, said real property, subject to a life estate to Sally Smith.” This means a woman’s mother, Sally, gets to live in the house until she dies, and then the woman’s daughter, Sadie, will own the property. Creating a life estate is done by redrafting the property’s deed to include mention of the life estate with the remainder passing to somebody else. Like any other property transfers, both parties must sign this deed, have it notarized, and then submit it to the recording office of the state. Such a document should be prepared by a competent real estate attorney. Living trusts have come to replace the role played by life estates, which are not as commonly used today. However, there are some advantages to this form of inheritance. For example, this method is useful to the heirs as a means to increase the property’s value following the death of the decedent. A life estate can also help avoid probate, which is a legally required process to transfer the property from the deceased to his descendants, but which can be sidestepped by using a life estate instead, since it is not technically an inheritance. A life estate can also be called an “instant transfer.” There are, of course, tax implications when using a life estate. Section 2036 of the Federal Estate Tax Code treats life estates as a gift. The gift tax must only be paid if the value exceeds a specified amount. If the property is sold after the end of a life estate, there is no net gain that needs to be reported on taxes because of the

value step-up. In case your total property value is more than $1 million dollars or if the property is in a different country or state, though, you should absolutely take a cautious approach to drafting a life estate and retain the services of an attorney.

CHAPTER 4 Distribution Among Family Members

While drafting a will, its maker usually makes provisions for the major parts of his or her estate—cash, stocks, expensive jewelry, and heirlooms. However, it is common that people do not make provision for most of the more mundane personal property items in their will—furniture, automobiles, household effects, and the large number of other items acquired and stored over a lifetime. The usual provision is that the remainder of the estate be divided equally or equitably among the heirs. Dividing the personal property of a deceased family member is emotionally difficult and engenders hard feelings and disputes among heirs. To assist with this, an equitable process is outlined below:

SORT OUT ITEMS F T ITEMS FAMILY MEMBERS INTEND TO KEEP

This first step requires the time, energy, and fortitude to go through every item in the house that you or your family members intend to keep. So closely following a loss, it can be painful endure inventorying and disposing of the possessions they have left behind. Before moving on to selling or auctioning the items, it is crucial to establish a boundary or limit to who among the family members possesses the right to keep sentimental items or properties, especially among siblings. If the will or law requires the property to be divided equally, then you must follow it.

For better organization, you are encouraged to separate the items you wish to keep in a separate container or location to avoid confusion with other items you intend to sell, donate, or throw away. Mutual agreement between siblings or other family members can decide who will keep which sentimental objects without further dispute. A mathematical algorithm was developed to fairly distribute an inheritance among the siblings within a family. The algorithm developed is to divide the inheritance between them equally. For example, a deceased parent left an antique firearms collection to be divided equally between his four children. There was an uneven number of items of varying values. Each sibling wanted some of the same items. The solution was to have the collection assessed, item by item, by a professional dealer. This established a total worth for the collection, such that each sibling knew the dollar worth of his or her part. The collection was laid out in a room, each piece tagged by value. A coin flip decided which sibling would choose an item first, second, and so on. The siblings went around the room choosing until their value was reached. In the end, the siblings did not have the same number of items, but had each received an equal share of the collection’s value. In the event of serious disputes over the equal distribution of items between heirs, the family can resort to working with a mediator to resolve a fair distribution of items or properties. This is an equitable system for when the family does not wish to liquidate the assets or rejects joint ownership between heirs. Each member submits his or her own prioritized list of items to the mediator. The mediator then prepares a list for each member of the family of the items allocated for each of them. Each

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