Welcome to Taking Stock, a space where we can take a deep breath and try to figure out what the COVID-19 economy really means for our finances. Every month, personal finance expert Paco de Leon will answer your most difficult, emotionally charged questions about money. This last two years have forced many of us to reprioritize our finances, and there’s no clear road map for getting through the pandemic yet — but Taking Stock is here to help us figure it out together.
This month, we’re talking about inheritances — both planned and unexpected. Have you found yourself in a similar situation as our letter writer below? How did you deal with it? Tell us your experience here.
My beloved landlord passed away last year. His son decided to give me the house I’ve rented from him for a while now. He wrote out an informal contract of sorts on paper, stating the house is mine so I won’t have to go through probate, the tenuous legal process for distributing property after someone dies. I’ve talked to him about putting my name on the deed, but so far that hasn’t happened, and I’m not sure how I should move forward.
There were back taxes owed on the property. I paid off a chunk in order to keep the house off the chopping block, and I’ve spent more on some things I’ll need in order to begin fixing up the home. With tax season upon us, more taxes are due on the property, plus homeowner’s insurance and other costs. But I’m afraid to spend any more money, because my name still isn’t on the deed of the house. There are several things I’ll have to repair in the house soon, so I want to be smart about my money.
I don’t know how to move forward. Do I need to get the deed in my name, since I have the agreement with my landlord’s son, and I’m currently living in the house? If so, what needs to happen? Am I responsible for paying the property taxes for 2022?
Dear waiting in vain,
Well, the good news is, receiving a gift like this is such a generous and kind act. The bad news is, this situation sounds a little out of the ordinary to me. However, that might only be the case because you’re lacking all the details necessary to navigate confidently.
Before you make any decisions and continue to take on any more costs for the house, you need to get clarity on the situation. I think the best way to go about gaining this is to enlist the help of professionals; they’ll be able to get a full understanding of this process and help you navigate the legal and financial implications of possibly inheriting this house. Get the counsel of an accountant and an estate planning or probate attorney. That is my full advice to you. Do not pass go; do not collect $200.
Think about it like this: Buying a house is the biggest purchase and the gnarliest financial decision most people will make in their lifetime. A home tends to be the largest and most valuable asset on a person’s balance sheet, and the mortgage is usually the biggest liability because it’s the loan you take out to buy your biggest asset.
Your situation is more complicated because it involves gifting to non-heirs. Further, maybe your landlord had this property in a trust or a Limited Liability Company (aka an LLC) that’s governed by provisions or an operating agreement, such as how ownership can be transferred and under what circumstances. If that’s the case, these documents need to be referenced in order to transfer the house properly and legally. This is a significant financial transaction, so you’ll need more clarity than a vague back-of-the-napkin, informal contract.
Should you be paying and assuming financial responsibility for this house even though you don’t legally own it yet? Probably not. So, then who is responsible, and what are the financial implications? These are great questions. This is why I strongly suggest seeking advice from an attorney and an accountant who can better help you navigate this.
Even though I can’t give specific advice on what to do here, because I am not licensed to do so, this all brings up some important considerations. For the folks that have assets — like investments, real estate, or anything valuable — that they want to pass on to their heirs or other beneficiaries, it’s important that you take the time now to plan for it. This is especially important once you have children and dependents whose future you’ll want to think about.
I spoke to estate planning attorney Sunny S. Kakwani of Oregon-based As Your Counsel Legal Services + Business Counseling, to help me understand the estate-planning process a little better. Kakwani said a lot of folks begin their estate-planning journey worried about how overwhelming, costly, and obtuse it may seem. However, all it takes is just a little bit of planning that can result in feeling a huge sense of relief. There are five areas to focus on and address when making an estate plan:
Create a last will and testament and decide who your beneficiaries are and what they’ll receive.
There are different ways to designate and plan for succession — from trusts to account titling. When it comes to account titling, there are designations, like transfer upon death, that allow the assets in an account to be transferred to a joint owner or beneficiary upon the death of one an account holder. One thing we can all do right now is to review the beneficiary designations on our accounts and make sure someone is named.
If you have children or dependents or pets, guardianship is another important pillar of estate planning.
If something were to happen to you, who would care for and raise your children in your stead?
A medical or health directive is important to consider in a situation where you may be unable to make medical decisions for yourself.
This ensures that not only your wishes are executed, but it will also alleviate your family from having to make decisions on your behalf that might go against yours or have the potential to create conflict among family members.
Get a springing power of attorney.
This is a POA that “springs” into effect when you become incapacitated and gives a person or group you designate as your agent the effective authority to handle your property, money, and estate if you cannot.
Choose an executor that will handle all the administration of your estate.
They’ll carry out the terms of your will.
Estate planning not only helps you plan for these big decisions that impact your family, you can also work with an estate-planning attorney to help you avoid the aforementioned probate process our letter writer could be facing. (Please note, I’m not an estate-planning attorney or probate attorney, or any kind of attorney, in fact, so keep in mind that this is not legal advice, just information about a legal process.)
Here’s why doing all of the above will make things so much easier.
Remember, probate is a formal legal process during which a probate court validates your will, authorizes your executor to distribute your estate to your beneficiaries, and pays any taxes your estate may owe. If you don’t have a will, a further administrative proceeding must be held to determine how your estate will be divided. Further, probate laws differ from state to state, so if you don’t have a will, it’s important to know if the state in which you reside deals with community property laws or not.
All of the above means it can take months, even years, and a ton of money – from executor fees and attorney costs to appraiser’s fees and court filing fees — to finalize an estate especially if there’s no will involved. Some folks create trusts to avoid the probate process entirely. While it may not be the right move for everyone, consulting with an estate planning attorney will help you understand if it’s right for you. While estate planning costs can be in the thousands of dollars, the amount you can potentially save could be a many multiples of that.
It will already be a challenge for your loved ones to navigate and deal with loss. A little bit of planning in advance can go a long way and can make an already challenging process less stressful.
Your favorite finance friend,
Do you have a question or dilemma you’d like to see answered as part of Taking Stock? Submit it here or send us an email at firstname.lastname@example.org.
Like what you see? How about some more R29 goodness, right here?