Heirs of a deceased individual are designated by law to inherit properties upon the person’s death whether it’s by law or by will. In instances like these, heirs often find themselves with the good fortune of becoming the owners of their first ever or an additional piece of real estate property that they can either sell, rent out or put into some other use. However, there are a couple of processes involved before an inherited property becomes the property of the heirs. This process, called probate, is a legal process of distributing properties according to the will of the deceased, or according to law.
Probate: What is it?
The entire probate process deals with the distribution of properties and assets by the court. If there is a will, the distribution is done according to the provisions in the will. If there is no will, the court decides how distribution is done. While there are certain types of inheritance that can avoid probate, such as beneficiary designations for 401ks and life insurance policies, trusts, and assets jointly owned, most real estate properties often must pass through probate.
Other types of properties that will be required to pass through probate include cash assets and cash accounts solely owned by the decedent, personal property such as jewelry, cars, valuable artwork, and assets that allow the naming of beneficiaries, such as insurance policies where none have been named.
The 4-Step Probate Process
File petition and give notice.
The first step is to file a petition in court to admit the will or appoint an administrator for the estate if there is no will. The court then issues a notice of hearing to all interested parties such as the decedent’s heirs, beneficiaries, creditors and any other party who has an interest in the decedent’s estate.
Inventory of estate properties
The court may appoint an appraiser to conduct an inventory and appraisal of all assets, including cash and cash accounts, bonds,stocks, business interests, personal and real estate properties.
Payment of Taxes and Other Liabilities
Once the estate has been appraised, the representative or executor determines which creditor claims are legitimate so the estate can start payments. This is also the stage where properties may be sold to pay off medical and funeral expenses, overdue real estate taxes, and other liabilities.
Transfer of Titles
Once all debts and liabilities are settled, the representative may petition the court to transfer the remaining properties to the decedent’s heirs, as provided for in the will or by law. This can only be done after the waiting period for filing of claims by creditors has expired. Once the court grants this petition, the representative may start drawing up deeds for the transfer of real estate and personal property, stocks and bonds, and transfer the properties to the heirs.
Probate can be a costly and time-consuming process for all parties involved but it is necessary before assets can be distributed to beneficiaries. Heirs are likely to spend on court fees, appraisal fees, and attorney fees. Depending on the size of the estate and the state where the deceased lived, the entire probate process can take between four months to two years to be completed.
Dealing with Probate Properties: First Steps
Heirs to a decedent’s estate are required to comply with certain requirements to formally inherit the property, whether they plan to keep the property or sell it. For real and personal properties that are inherited, heirs may be required to pay for estate, inheritance, and other taxes. It is therefore important that as early as possible, you procure the necessary documents such as bank account statements, copies of the will, information on stocks, bonds and other investment accounts. It is also important to compile a list of legal heirs, creditors and other names who may have an interest in the estate to help the court speed up the probate process.
Should you sell inherited property?
Selling the property has its pros and cons. For one, not all states provide a tax exclusion for the sale of inherited properties. In most states, a tax exclusion is only available if you are selling an inherited home that you have lived in for two years prior to the sale.
However, heirs are also given the benefit of a stepped up basis when they sell inherited property. The stepped up basis depends on the fair market value of the property at the time of death, as opposed to the original purchase price paid by the decedent. The stepped up basis is the difference between the two, and this value is considered the capital gain and therefore the value that is subject to tax.
If you do decide to live in the property for two years before selling it, you become eligible for capital gains exclusions, which is $250,00 for individual taxpayers and $500,000 for married couples who file jointly.
If you have enough liquid assets to support a second property, experts recommend waiting before making the decision to sell the inherited property. Doing so can help you make avoid emotional decisions. The time can also be useful for doing maintenance and repairs if you, later on, decide to rent the place instead. This option can be the ideal solution if you need additional passive income.
Tips for Quickly Dealing with Inheritance Estates
Your lawyer can help you make the best decision when it comes to dealing with inherited estates. For one, if accepting the property can cost you more than it’s worth, you can always refuse the inheritance. This is the primary option for heirs who do not want to deal with the property at all. You can do this by executing a disclaimer that you then submit to the representative of the estate or file with the probate court handling the probate proceedings.
Another option is short sales. Homes with attached liens that are greater than the market value of the house may be disposed of through a short sale with the lender or quick sale buyers.
Advantages of Selling an Inherited Property
There are many advantages to selling a house or any other piece of real estate. There could be more than one heir and they do not agree on how to divide the property. Selling is one way to avoid conflict and disagreement among heirs. Selling the property is also a way to avoid spending more on holding and maintenance costs, taxes and mortgage payments. Inherited properties tend to come with needed repairs and maintenance which the heirs may not be interested to attend to or spend on. Selling the property is one way to avoid these expenses. There are some cases when selling the property may be part of the decedent’s will, which is enough reason to put it up for sale.
At the end of the day, any decision regarding inherited property of considerable value must be done with ample thought and preparation. Allowing some time to pass before making any major decisions, such as putting the property up for sale is ideal so that you can make the decision with a clear head and with a good idea of what to expect, whether you decide to keep the property or sell it. Your lawyer can help you in the process of fulfilling the legal requirements for succession and in making the decisions concerning your ownership of the inherited property. He or she can also help you through the legal process of probate to ensure that it goes as smoothly as possible.