Monday, December 18, 2017 / by Robert Woessner
Legal Aspects of Selling an Inherited Home
While selling an inherited home is the one good and viable solution to effectively address the complications and disputes connected to splitting the property, there are a few legal aspects you first must know so that you are able to make informed decisions and avoid some complications that may arise.
A will on an inherited estate is a legally written document that is authoritative in deciding what should happen to the property regarding the voluntary decisions of the estate owner. The author of a will is usually the sole owner of the property who enjoys complete rights to it and who drafts the will in favor of the legal heirs or the individual(s) he or she wants to inherit the property.
The will also nominates an executor who has complete authority to oversee the proceedings of the inheritance and ensures that the transfer of titles happen as stated in the will. The will concerning the estate makes the process of inheritance undisputable, smooth and hassle free. If there is no will in place, then the established legal laws that govern the given state will come into play and, if needed, a court will intervene to settle any issues.
The inheritance gifted with a will can happen through three ways. The most common method is called a Solemn Form Probate. Upon the appointment of the executor, he or she sends out a notice to all the heirs at law which becomes legally binding.
Heirs at law are those who inherit the estate in the absence of a lawful will. However, they might or might not be the beneficiaries as per the will. The notice requires all the heirs in to either object or contest the will if they wish to before the mentioned deadline.
The petition should be accompanied by the original will. The proof of executing the will needs to be furnished, either through a self-proving affidavit or testimonies of witnesses. The court will appoint someone to act as guardian ad litem for any minors or incapacitated individuals inheriting the property.
The second method is a Common Form Probate. This procedure can be carried out without any notice to the heirs in law, but cannot be deemed as binding for four years following the appointment of the executor or four years after the minor heir attains the legal age of inheritance.
The proof of proper execution and the need to provide the original will are the same in this case as in the case of Solemn Probate. Following Common Form Probate, heirs in law or other interested parties can file an objection anytime up to four years after the Common 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) from his responsibility.
The executor can be selected by the majority of the beneficiaries. For the sake of minors or incapacitated heirs, the court appoints a guardian ad litem. 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 the assets.
But 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 the co-owner who survives. To transfer the title of an automobile, probate is not needed.
In the absence of a will that names an executor, state law gives out a list of people who can discharge the responsibility. If there is a necessity for a probate court proceeding, then the court will choose the administrator based on the priority list. The 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 direct how the children inherit the property.
Inheritance is not always a happy thing that happens smoothly. Often there are a lot of confusion and frustrations associated with it. While the authors of the will pass on the property with the best of intentions, inheritors often have to spend a great deal of money, effort and time.
The tax burdens accompanying the inherited property are always 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. Tax laws also significantly differ from state to state.
Therefore, you need to understand the inheritance tax laws of your state. For simplicity, the broad kinds of taxes applicable over inheritance are discussed here.
Estate Tax: Federal estate tax does not apply to inheritance since there have been changes made through legal statutes.
However, there is an upper limit regarding the property value which estate taxes would apply. Certain states, however, impose their own taxes on inherited assets.
Inheritance Tax: There is not a federal inheritance tax.
While it is common for some people to refer to the federal estate tax as an inheritance tax or a death tax, there is a huge difference between these two types of taxes.
In some states, both of these types of taxes do apply. It is the responsibility of the estate to pay estate taxes and not the heirs. On the other hand, the heirs pay the inheritance tax.
The taxes you are required to pay depends on where you live and what laws govern the state.
Property Tax: Upon inheriting the property, the heirs are required to pay property taxes.
Property taxes must be paid for as long as heirs continue to own the property. Usually you will be required to pay more taxes than those paid by the original owner because property tax value will be decided by the current value of the property based on a reassessment.
In some states, the reassessment is not done if the heir is the spouse or child of the owner passing on the property.
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 the taxes on the profit margin you have from the sale of the property. This is assessed on how much you sell the property for and what the value of the property was when you inherited it.
This means you will not be required to pay any capital gains tax if you sell the property immediately after inheriting it, since the property value has not gone up.
Reporting the Inheritance: It is necessary for the executor of the estate to report the inherited property by filing an estate tax return.
The basis of the inherited home is decided on whether the sale is a gain or loss. It is decided based on when you inherited the property. In most cases, the basis for inherited home is the market value of the property on the date when the deceased person died.
Reporting the Sale: While selling the inherited home, you are expected to report the sales on your income taxes.
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. You will also need to copy the gain or loss amount over to your 1040 tax return form.
Name on Property
When you inherit the personal property, the process is very simple and the procedure is straight forward. The will or the court’s decision may be enough to transfer the title of the property to you. In case of inheriting real estate, things can be a bit more complicated.
This is because the 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 new owner of the property.
The documents you will need in this regard include the death certificates of all the owners and the 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 during the time of death of the deceased.
If the property is 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 the joint owner’s death.
If the person that you inherit the property from has died first, then the property would revert back to the other owner and so you must now establish your claim as the legal heir to the property. If the will states you as the inheritor, then you will require an executor’s deed.
If the inheritance is facilitated lawfully by the court in the absence of the 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.
A life estate means someone having a real property interest for lifetime, which will automatically revert back to the owner, his family, or an authorized third party. It is a kind of possessory interest entitling the tenant to benefit from the property. The one receiving the remainder of the life estate is known as the “remainderman”.
There are two types of life estates: the standard life estate and life estate pur autre vie. An estate is said to be pur autre vie, when a lease is made of lands or tenements to a man, to hold for the life of another person.
The standard life estate lasts as long as the person occupying the property is alive. While the life estate pur autre vie is based on the life of a third person.
The objective of both life estate types is to give the rights over the property to the beneficiary for the duration of a single life and then returning the property back to the original owner, his family, or an authorized third party.
Creating a life estate is done by redrafting the property’s deed to mention that it is a life estate with the remainder passing in fee to somebody else. Like any other property transfers, both parties must sign this deed, have it notarized and then submitted it to the recording office of the state.
Since living trusts have come to replace the role played by life estates, they are not commonly used today. However, there are some great advantages to this archaic form of inheritance.
This method is highly useful to the legal heirs to increase the property 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.
In other words, a life estate can be called an “instant transfer”. There are also some significant tax implications in 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 the 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 on account of the value step-up. In case your total property value is more than $1 million dollars or if the property is located in a different country or state, you need to take a cautious approach while drafting a life estate by using the services of an attorney.
Some countries do not recognize living estates. In these cases, a skilled and experience lawyer will have some better options to help you avoid the burdening tax costs.