When There’s More Than 1 Sibling, What Happens to the Inherited Family Home?

My estate shall be divided equally among my 3 children. That’s probably the most common final directive in a last Will and Testament. But what happens when most, if not all, of an estate’s assets are real property. Think: the family home.  The most common property siblings jointly inherit is a house. How do you divide that very tangible asset among 3 people?

In a best-case scenario, the siblings would agree unanimously on a fair and equitable settlement: Sell the home and split the proceeds equally. Distribute other assets so one heir retains the property or negotiates buyouts for those wanting cash.

Flaws of Nature

But human nature isn’t always so rational…or even kind…especially when there’s a decent amount of money at stake. What happens when siblings are counting on an inheritance, or their financial needs are different? What if one sibling has devoted her life to caring for their parents? What happens if there’s already acrimony among the siblings in the first place?

Unfortunately, as is often the case, specific instructions regarding the disposal of the property are not provided in the decedent’s estate planning documents. Consider these situations which pour fuel on the fire: One sibling has lived in the home taking care of the parent and wants to stay but can’t qualify for a mortgage to buy the others out. Or the caregiver may have a financial windfall from the deceased outside of the will—perhaps in jointly held property, bank certificates, or as the life insurance beneficiary. This may seem fair, and probably is, but that added benefit bestowed upon the caregiver adult child causes dissension among siblings, who then resent having to give the caregiving sibling an equal portion of the estate. And sometimes a sibling with greater wealth will have an unfair advantage to acquire the home.

Those Essential Family Conversations

There’s no better example of the need for important family conversations when parents are still healthy and fully in command of their cognitive capabilities—no better example for the requirement for estate plans with Wills or trusts in which everything is stipulated in black and white.

Even more important is this admonition: “Parents should never divide an indivisible asset in hopes that it will bring their heirs together,” says Lee Hausner, a Los Angeles-based psychologist and author of Children of Paradise: Successful Parenting for Prosperous Families, an instructional book about handling family assets. She’s seen contentious situations—even fights between siblings that turn physical.

Ideally, in these situations, the siblings must amiably turn to a Plan B. Here are the most common options for splitting an inherited home with siblings when the estate planning documents do not provide for this contingency:

Sometimes There’s No Sibling Resolution

Still, sometimes none or some of the siblings are not ready to compromise. The real nail in the coffin is when one of the siblings thinks they’re getting the short end of the stick—or their own spouse who is not a bloodline family member starts sharing poisonous ideas—and this sibling begins to make waves.

If all else fails and an agreement cannot be reached, the siblings may have to involve the court in order to force the sale of the property and terminate their co-ownership. In this case, heirs who want to sell the home file suit to force its sale against the wishes of those who want to keep it. An impasse like this is called a partition action and can be devastating to a family.

Some Prudent Counsel

There’s no denying the fact that estate planning in which parents and adult children speak openly about their plans, finances, and other important issues that could become factors is essential. Rules of thumb surrounding these talks include:

At Phelan, Frantz, Ohlig & Wegbreit, we can help you facilitate these important conversations and provide you with the thoughtful guidance on sensitive issues. This will help your heirs avoid acrimonious situations when you are gone.

Call us at 908.232.2344 to get your estate planning underway or to review it. Planning today will ensure a brighter future for your loved ones tomorrow.

 

 

What to Do With Your Cherished Home When You Die: It’s Not as Easy as You Think

The reality is that leaving your house to your kids when you die is not always what your heirs want you to do with it. Trust us. All you have to do is ask your kids.

If you’re like most clients, you come to our firm to talk estate planning, and your focus is typically your Will or Trust, your retirement plan beneficiaries, and the tax strategies that will allow your kids to get the most out of their inheritance. All too often a discussion about what will happen to your house—even your vacation house at the Jersey shore—gets left by the wayside. There’s a good chance your emotions run deep and that you have an intense attachment to your family home. Your assumption, therefore, is that your kids have the same connection to the house that you do.

Please think again. The two operative words here are emotions and assumption. Your home surely holds wonderful, rich memories. It is likely also your single largest holding and in today’s housing market, that may very well constitute a good amount of money and a substantial investment. Word to the wise. Emotion doesn’t work with decisions that are innately investments.

As for your assumptions…you’re first assumption is that everyone gets along. But if your kids argue now about who ate the frosted flakes, how are they going to get along when the stakes are higher? Suddenly they’ll be faced with decisions about upkeep and maintenance or renting the shore house. Decisions like that can fracture families.

As importantly, your assumptions don’t take into account the natural progression of family events. You’ve cut the apron strings and enabled your kids to chart their own course and flourish. A house may be an encumbrance that undercuts your children’s vision of their future. Keeping the family home, then, may end up being a curse rather than a blessing.

Examine your feelings

There’s no question that the emotional attachment you have to your house is understandable. You’ve created memories there. Your vision is to make it part of your legacy. You want your kids to have the opportunity to live there…to have their kids go to their school. Or, if it’s your shore house, you want them to enjoy memorable summer days together and then pass the house on to your grands, so that it will stay in the family forever.

As warming as that idea is, it has the potential of becoming an at all costs proposition: It doesn’t really account for life changes that your children or grandchildren may have one day. What if work takes them all over the country even around the globe? Plus, as they create their own families, the circle widens. It can even and likely will include in-laws. Before you know it, you have 15 people who can’t get along managing a house together. There are added risks such as divorce or, even worse, death. In in lieu of family harmony you may end up with in-fighting and discord.

It’s important to understand that emotion and assumption can take you down a rocky road when you’re making decisions today that will impact your children long-term. Even though it may be difficult, try to step out of the emotion and think more pragmatically. Discuss the idea of leaving a house to your kids with your estate planning attorney. She can illustrate some worst-case scenarios that, guaranteed, are far different than the vision of the ongoing family unity you see in your mind’s eye. You may not want to hear what your attorney has to say, but the dose of reality can help you give up emotion for more pragmatic thinking.

Have those important family conversations

Estate planning isn’t, after all, one sided. This is especially true when leaving a house to your kids and all the responsibility that comes with it. Just as you discuss financial matters such as who in the family will be your Power of Attorney or Healthcare Proxy, have a frank discussion about whether they can envision themselves living or vacationing in that house. Make them understand that you want and need them to be forthright. Steel yourself against potential disappointment and be willing to let go of the motivation to have them inherit the house. Without some outside-the-box thinking on your part, it could end up as an inheritance at any and all costs. Their honesty now about the vision they have for their lives going forward may initially sting, but it’s a good preventive for problems in the future.

Create happiness. Prevent messes

Sometimes we are unable to convince clients that leaving a house to their kids may not be prudent. In these instances, creating a Will or Trust that provides a degree of flexibility for a potential sale or buyout is a viable second option. On the one hand, the parent’s hopes and intentions are honored. On the other, their kids, grandkids, even nieces or nephews who may be beneficiaries can take comfort in knowing they have an out—have the ability to make decisions that will work for them—if sharing the family home or even managing it alone does not come together smoothly.

Flexible documents include language that delineates how to get somebody out of the property if the situation doesn’t work and how to unwind the inheritance by selling the property. The language of these documents:

A dollar versus fair market value

So, is the buyout for a dollar or is it to real market value? That’s a question that can and does come up. The answer to that question is unequivocally always fair market value. Anything different or less, and it’s a gift that could subsequently interfere with their estate planning and how they distribute their assets to their loved ones. It comes down to the fact is that if they have an ownership interest in the house anything drastically short of fair market value is gifting. That’s a massive issue, especially right now with the proposals in Congress that could significantly bring about estate tax reform.

One last salve

There are plenty of situations in which the moment the Will is read, one of the kids says they clearly have no interest in the property. In this situation, as long as all the beneficiaries agree, the law will allow for there to be a distribution in lieu of the house. This means that the sibling who doesn’t want the property gets other assets from the estate and the other two siblings get the house. In other words, a clause can be written into the document that gives flexibility to the final distribution. And again, that distribution must be made in alignment with fair market value of the property at the time of distribution.

Rational decisions are key at any juncture 

The image of your children having a “What was my dad thinking?!” reaction to your Will is far from pleasant. Being well-thought out from the get-go is one way to avoid it.

Discuss these matters with your family and your estate attorney as you develop your estate plan. Make certain reason trumps pure emotion. Work with your estate attorney to include flexible language. These actions are among the ways to steer clear of the mess of family discord.

At Phelan, Frantz, Ohlig, & Wegbreit, LLC, we know how much your loved ones matter to you. They matter to us, too.

Call us at 908-232-2244 and cover all the bases to ensure your legacy will bond your family, not divide it.

MORE THAN DIVVYING UP YOUR ASSETS: YOUR ESTATE PLAN BECOMES A GIFT TO YOUR FAMILY

Lessons of Intention and Preparedness That Stick

COVID-19 has taught us many lessons, including the importance of being intentional, prepared and ready to confront uncontrollable situations. New Year’s resolutions tend to do that for us, too, because they get us started on a focused beginning as we ring in another year. Should you be wondering what to include among your resolutions, consider putting a review of your estate plan at the top of the list. If you haven’t already visited your attorney to create these documents, or review them, it’s definitely time to do so—and pend your estate plan for at least five years when it will be time to re-evaluate it.

More than divvying up your assets

We’ve all heard about the importance of having a Will, but there’s more to estate planning than how to divvy up your assets. A number of our other blogs address the importance of having a fundamental estate plan in place. Two less frequently talked about but related issues include protections for your college or travel-bound 18+-year-old child and the importance of storing your account passwords in an accessible location.

If you’re the parent of an 18-year-old who’s heading back to college, you’d be wise to have your young adult sign a durable power of attorney with healthcare proxy language before taking off. By signing these documents, your children are giving you permission to act on their behalf and be their important and immediate fallback should a health or financial emergency occur.

A helicopter parent…not

You don’t have to be a helicopter parent to orchestrate this. In fact, COVID has highlighted the need for these documents. We’ve heard of too many kids, now chronologically and essentially adults, who went off to school and got sick with COVID. Their parents had difficulty gaining information about the severity of their child’s illness or finding out where their kids had been moved to quarantine. Plus, there were too many unanswered questions about how the school would plan to keep them safe going forward.

The unknown is tortuous

There’s nothing more troubling than the unknown when it comes to your kids’ wellbeing. The Health Insurance Portability and Accountability Act (HIPPA) works as a great safeguard to your individual privacy because it prevents individuals beyond adult patients and their health care providers from sharing information. But as a parent, it could work against you when it’s time to protect your son or daughter if they’re facing a scary health emergency.

COVID, as well as other health emergencies, could require intercession for life-saving decision-making. Your child may have a high fever and be too sick to discuss a need for surgery. Also, the treating medical professionals may need to know that your youngster reacts allergically to certain medications. Even financially, your child could be quarantined someplace in the states or abroad and unavailable to perform time-controlled financial activities like signing a lease or talking to a creditor.

Sowing privacy oats versus clear communication

The reality is, however, that although you can drive your kid to your lawyer’s office, they must cooperate. At 18, your youngsters may be feeling their oats. They may not want you to know their business, even though these documents benefit them as they would any adult who grants a trusted other the power to act on their behalf when situations require. Clear communication with your child about when and how the documents would be used is critical. Helping them understand that having a healthcare proxy and a durable power of attorney in place are safeguards not encroachments. An experienced estate planning attorney can help explain the value of these documents to your new adult and likely will ask you to leave the room in order to ensure complete understanding and consent.

Where are your passwords

Where are your passwords

Another important aspect of an effective estate plan is password accessibility. If you’re like many of us, you may misplace or forget your passwords. Passwords are not one of the first things we think about when it comes to estate planning. But nine-times-out-of-10, they are the key to where important information is located.

It’s a good idea to store your passwords in a special folder or envelope that you turn over to your estate attorney. This will make it easy to put a finger on everything when the information is needed. Also be sure to include your passwords on a spreadsheet that catalogues all your important documents and their whereabouts [e.g., Will, Durable Power of Attorney, Trusts, Living Will and Advanced Healthcare Directive, house deed and mortgage documents, investment and 401(k) accounts]. Storing extra password copies in a safety deposit box that holds important documents is also an added protection, as is providing your attorney and your appointed fiduciaries an extra key to your safety deposit box.

In the end, a gift

A new year, especially this one, comes with hope for the future. A topic like your estate may seem dark, an intrusion to holiday spirit and a counterpoint to positivity. But there’s no escaping the importance of the preparedness that comes with having an estate plan. There’s no time like the present and the symbolism of the new year’s resolution to take action. If you think about estate planning as a gift you’re giving your family, you just may decide that there’s no better way to ring in the new year.

When you turn to Phelan, Frantz, Ohlig and Wegbreit, LLC, we will partner with you on every step of your estate planning process. Call us at 908.232.2244 to set up an appointment, begin a new year with intention and be prepared for wherever life takes you and your family.

RECIPE FOR A TRUST

You’ve decided you want to set up a trust but telling your attorney that you need a ‘trust’ is like telling a baker that you need a ‘cake’ – it leads to a cascade of questions: What’s the occasion? What ingredients do you want in the cake? Do you want to share it with lots of people or only a few? How much do you want to spend? Are there any food allergies to consider? In short, just like there are different kinds of cakes for different occasions, there are dozens of different types of trusts for different purposes. To cook up your custom trust, an experienced estate planning attorney will explore all these questions with you.

WHAT’S THE OCCASION?

There are a variety of reasons clients may want a trust:

This is in no means an exhaustive list, but a few examples of the occasions an individual may seek to establish a trust.

WHAT INGREDIENTS DO YOU WANT IN THE CAKE?

Trusts can own almost any asset, including cash and real estate. Trusts also can be the beneficiary or owner of a life insurance policy or the beneficiary on an IRA or 401K. The implications of a trust owning each of these assets varies, so it is critical to discuss your plans in this regard with an attorney and accountant before making a move. It also is important to discuss the “amount” of ingredients you want to put into the trust. Depending on the type of trust, your ability to manage or access assets put into it can be limited, so it may not make sense to transfer all of your assets into a trust.

DO YOU WANT TO SHARE IT WITH LOTS OF PEOPLE OR ONLY A FEW?

Like a Will, a trust should set forth how the assets held in it will be distributed to beneficiaries upon your death. A trust is even more flexible than a Will, however, in the sense that it also may provide for the provision of income or assets during an individual’s life.

HOW MUCH DO YOU WANT TO SPEND?

Creating and maintaining the formalities of a trust can be costly. In some cases, a trust may become a tax paying entity, which means that an annual income tax return should be filed. In addition, the individuals responsible for implementing the trust – the trustees – are entitled to a commission based on the value of the assets held by it and any income made by those assets.

ARE THERE ANY FOOD ALLERGIES TO CONSIDER?

In many ways, this question can be the most critical. Trusts frequently are created to protect and grow assets for those who may not be able to manage them on their own. Whether a special needs trust or a trust created for minors, the unique circumstances your beneficiaries must be considered in drafting the terms of your trust.

These are important pieces of the pie (no pun intended) to be considered. The estate planning attorneys at Phelan, Frantz & Peek are experts in the creation of trusts for all occasions and in a variety of flavors. Contact us to make an appointment today to discuss your needs.

 

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