Here’s What Happens When You Inherit a House

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Research shows that the number of people leaving inheritances has increased in recent years. Here’s what to expect if your inheritance includes a home. 

Inheriting a home is far less daunting if you go into the experience with a plan in place. Here, we’ll cover some of the most important factors to consider.

Financial and legal responsibilities

Right away, you’ll be responsible for paying expenses. Whether you’re the sole beneficiary or inherit the home along with others, bills have to be paid. That means not allowing anything to fall through the cracks. Here’s a sample of bills that will need to be paid.

Mortgage

If there’s still a mortgage on the property, it is not forgiven when the owner dies. Plan now to make those monthly payments until you determine whether you’re going to keep the house.

Insurance

You’ll need to have the homeowners insurance policy rewritten in your name. You can either stay with the same insurance company the previous owner used or shop around for another policy. Some insurance companies allow beneficiaries around 30 days to put a new policy in place.

There is an exception to this rule: If the home goes into probate, you can’t assume ownership until the probate process is complete. And if you don’t have ownership, you can’t have it insured in your name.

Still, it’s up to you to make sure the house is fully covered against loss. Either you, or the executor of the estate (if that’s someone else) should contact the current insurance company to ensure the home is covered. If coverage is about to lapse, ask about a short-term policy.

If the house has a mortgage, the mortgage lender will require you to maintain coverage. If there’s no mortgage, you may be tempted to live without coverage until the house is in your name. Don’t do it. All it takes is one lightning strike to burn your inheritance to the ground.

Taxes

If the deceased still made mortgage payments, property taxes are typically paid out of an escrow account (funded through mortgage payments). If there is no mortgage, you’ll need to cover the semi-annual or annual property tax payment.

Outstanding debts

Outstanding bills must be paid. Everything, from utilities to credit card payments are still due, even if someone dies. The only exception to that rule is if the deceased left no money and nothing of value behind. That’s not the case if you’re inheriting a home.

Make a plan

As mentioned, creating a plan now is far easier than deciding what to do next when your emotions are raw. Let’s take a look at the steps you can take to customize a plan that fits your situation. For illustration purposes, we’ll assume that people naming you as a beneficiary are your parents. These steps could apply to anyone, though.

Have a frank discussion with your loved one(s). Let’s say you expect your parents to leave you their home when they die. First, let them know you have some questions and ask if they would be comfortable discussing the situation with you. Find out if you’ll be the sole beneficiary of their estate or if they plan to leave it to a group of people. If you have siblings, chances are they’ll divide it up.Find out who the executor will be. The executor is the person who is trusted to carry out the terms of the will. They are legally bound to do things precisely as laid out in the will.If the plan is to leave the home to you and your siblings (or you and anyone else), have a conversation with those people. Let them know how important they are to you, and suggest working together now to plan for the day the home is passed down to you.If you, or one of the others, has a joint bank account with the deceased, that means someone will have access to funds at the time of death. Make sure the joint account holder understands that they will need to use some of that money to cover ongoing expenses, like mortgage, insurance, and utilities. No one benefits if bills go unpaid.If there are no joint accounts, find out if your parent’s bank account is designated as “payable-on-death.” Typically, an account holder can assign beneficiaries to their bank accounts to be paid out once the account holder dies. If that’s the case, those funds can be used to cover ongoing expenses.

The tricky bit

If you expect to inherit a home with others, agreeing on what should be done with the house once it’s legally your shared property can be like ice skating on a telephone wire. One person may dream of selling it and using their portion of the proceeds to start a business, while another wants to move in and raise their kids in the house.

Go over your options together. The goal is to come up with an agreement you can all live with. Here are some of the most common options:

Move in. Moving in can be a good choice if you can afford the home. However, if you’re splitting the inheritance with others, moving in may not be possible for any of you. It’s important to note (and share with the others) that you may not be able to simply add a name to the mortgage and take over the payments. It’s quite possible that you’ll be required to pay off the existing mortgage and refinance the house in the name of the party who will live there.Rent it out. Consider using the property as an investment vehicle. Before going this route, though, you may need to spend money to make upgrades to the house. You should also learn everything you can about what it takes to be a landlord and decide if that’s the right choice for you. Again, this option is more complicated when you are a co-beneficiary. Not only are there tax implications to consider, but you’ll also need to decide on things like who will pay for repairs, who tenants will call when a water pipe breaks, and how rental income will be divided.Sell the home. It’s not always in your best interest to keep an inherited property. If you’re looking for a clean break, selling is the easiest way to make that happen. If you do decide to put it on the market, plan to cover all ongoing expenses until it’s sold.

Reminder: Before making any decisions, speak with a tax professional to learn how each option will impact your bank account.

Losing someone you care about is tough, and it’s only made worse by floundering when what you really want is to make confident decisions. If you begin the planning process now, you’re less likely to have regrets later.

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