From this article, you will learn about the common inheritance problems and things to do when you get an inheritance to solve them.
We’ll talk about title problems, heir disputes, and tax foreclosures. We’ll also talk about estate planning instruments that make receiving inheritance easier.
Let’s start with the problems you may run into if you get an inheritance.
3 Legal Problems of Heirs’ Property
#1 Lack of a Clear Title
Imagine finding out you can’t sell or even borrow against the family home. That’s the harsh reality for many when a loved one passes without a will.
Suddenly, the house isn’t legally “yours” in the eyes of the law, and the name on the deed? It might still be your great-grandfather’s.
Without a clear title, heirs find themselves stuck. They can’t sell the house, get a loan against it, or even use it to access USDA farming benefits.
#2 Partition Actions
When heirs’ property is passed down through generations, it is now at the mercy of a single dissatisfied relative.
Anyone in the family can drag the rest to court to sell the place, even if the majority want to keep it.
When siblings can’t agree on what to do with their inherited family house, it’s not just Thanksgiving dinner that gets awkward.
With no plan in place, a ‘partition action’ can kick in, opening the door to legal battles that can end with the gavel deciding the home’s fate.
#3 Vulnerability to Property Tax Foreclosures
When a property gets handed down through generations without clear legal ownership, paying taxes on it can become a real headache.
Often, the heirs don’t even realize they’re on the hook for taxes until it’s too late. Because these heirs aren’t on paper as the official owners, they might miss crucial tax notices.
4 Best Things to Do When You Get an Inheritance to Avoid the Problems
#1 Proactive Estate Planning
Keeping everything about your estate sorted with clear documentation helps prevent issues down the line.
Proactive estate planning starts with a detailed inventory of assets and liabilities. Next is gathering all essential documents like wills, trust paperwork, and insurance policies in one place.
This doesn’t just keep things organized; it cuts down on family disagreements, simplifies the probate process, and ensures assets go exactly where the owner intends.
There are many ways to transfer property to heirs: co-ownership arrangements, wills, or transfer-on-death deeds.
Each has its benefits and drawbacks, especially regarding taxes and control over the property.
The best option seems to be the transfer-on-death deed. This allows you to transfer property swiftly and privately, while also allowing heirs to benefit from the step-up in basis tax provision.
For people who want more control while they are alive, setting up a living trust is their best bet.
The trust assigns them a designated successor trustee to manage or transfer the property based on pre-defined terms upon their death.
A living trust is a powerful legal instrument to avoid probate and keep the transition smooth for heirs.
#2 Utilize the Uniform Partition of Heirs’ Property Act
The Uniform Partition of Heirs’ Property Act (UPHPA) protects families from losing their properties in forced, below-market sales.
It ensures fairer and potentially higher sale prices, keeping properties within the family — and at their full appraised values.
The Act introduces a series of protections for heirs, including mandatory notices and property appraisals to determine the fair market value of inherited property.
It ensures every family member is kept in the loop and can partake in key decisions regarding the property — safeguarding against exploitation and preserving family wealth.
The Act also gives co-tenants the first shot to do inheritance buyout of any co-tenant wanting to leave, at a fair price set by the court.
They have 45 days of the notice of the property’s appraised value to exercise this right.
#3 Clear Title Issues with Legal Assistance
Fixing title issues often costs a lot, which can be too much for some heirs. Clearing title issues starts with finding out who legally owns the property through a title search.
Lawyers or title examiners handle this, checking the property’s history for any claims or problems.
If the property’s original owner recently passed away, you might still have time to clear the title through probate court.
But if too much time has passed, you might need to go through a quiet title action to officially figure out and settle who owns the property.
In most cases of heirs’ properties, the owner probably died over a decade ago. Figuring out all the heirs after many years can be tough. Lawyers use public and ancestry records to pinpoint possible heirs.
Once everyone’s identified, family members with smaller interests might give up their rights to those more connected to the property via settlement agreements, paving the way for a quiet title action to straighten out the records.
#4 Utilize Tenancy in Common Agreements
A Tenancy in Common (TIC) arrangement lets each heir own a unique percentage of the property based on their contributions or agreed-upon terms.
This setup helps mitigate future disagreements that stem from mandatory equal shares. With a TIC, heirs can sell, borrow against, or pass on their shares independently — no need for a unanimous vote.
While this flexibility is great, there is a caveat. TIC can lead to fragmentation of ownership and disputes if not coordinated properly.
To avoid the common headaches of TIC and heirs’ property in general, thorough documentation and estate planning are essential.
Drafting a will, designating beneficiaries, and clearly communicating rights and responsibilities can prevent many issues, ensuring smoother management and control of the property.
How to Avoid or Minimize Inheritance and Estate Taxes
1. Gift Taxes and Lifetime Giving
At the federal level, the rules combine gift and estate taxes. Basically, any gifts you give now will count against what’s exempt from estate taxes when you pass away.
Right now, only Connecticut charges a separate gift tax. But ten other states consider big gifts made right before death as part of your estate.
This means that in these states, heirs may still be liable to pay estate or inheritance taxes on gifts made just before death.
So for anyone considering this strategy, it’s essential to know the federal and state limits and rules concerning gift taxes.
You should also know that this can only help reduce, not totally eliminate, the taxes your heirs might face.
2. Moving to Another State
Many states, like Alabama and Arizona, offer a haven from estate and inheritance taxes, making them perfect destinations for individuals looking to minimize expenses.
Relocating to these tax-friendly states wipes out state-level estate or inheritance taxes, though you’re still on the hook for federal taxes if your estate exceeds $13.61 million.
Inherited property statistics show that since the federal credit for state taxes was eliminated in 2005, states have been vying to attract the affluent with lower or no estate taxes.
Moving to one with favorable tax policies can be a strategic financial move for anyone with a sizable estate.
3. Shift Assets and Investments into Tax-Advantaged Vehicles
Shifting your savings into an IRA or 401(k) could be a smart move when you’re looking to minimize inheritance and estate taxes.
Not only do these accounts shield your nest egg from immediate taxes, but they also keep inheritance taxes at bay, letting your money grow in peace.
Similarly, you can set up a trust. This isn’t just for the ultra-rich. A trust helps you keep your assets safe, skip the headache of probate, and cut down on estate taxes.
Plus, setting up a trust offers you more control over asset distribution.
If you have a family business, you can consider setting up a Family Limited Partnership (FLP).
By creating FLPs and transferring limited partnership interests to their kids bit by bit, parents can gradually move ownership out of their estate, reducing estate tax liabilities.
To Sell or Not to Sell Inherited Property: Factors to Consider
Beyond the emotional value of living and maintaining your parents’ home, keeping an inherited property might not be worth the stress.
Here are some things you should weigh when considering selling or keeping inherited property.
1. Financial Situation
Remember, keeping a house isn’t just about having a place to call home. It comes with ongoing bills — property taxes, maintenance, and sometimes, the sticky situation of buying out other heirs.
If hanging onto this house means your finances will take a hit, or forces you to cut back on critical financial goals like retirement savings, you might want to think twice. Is the house a treasure or a trap?
Before you decide, take a deep dive into the finances. Are there outstanding debts like an unpaid home loan if you inherited a house with a mortgage, home equity loans, unpaid property taxes, or other hidden liens waiting to bite?
Understanding what you’re up against is step one in deciding whether to keep the property or if you’re better off selling it to pay off its debts.
2. Property Condition
That old inherited house might look charming, but charm doesn’t pay for a new roof or plumbing. If getting the house ready means draining your savings, it might be smarter to let go and find a place that’s already set up for you or renters.
Sometimes, the hassle and cost of fixing things up just don’t make sense, especially if you can sell a house you inherited now and buy something else that fits your life better without the extra drama.
A well-kept house can sell fast and for more cash, while a property requiring substantial repairs could take a while on the market and is likely to sell for less.
If your inherited place is more ‘fixer-upper’ than ‘move-in ready’ (not to mention inheriting a hoarder house) you’ll need to decide if you’re up for the challenge (and cost) of sprucing it up.
Conducting a home inspection to know if you inherited a home that needs a lot of work can help you choose between rolling up your sleeves or cashing out.
If you decide to sell, you may run into the problem of not getting any interested buyers. Another issue is a deal falling through because a buyer’s lender doesn’t agree to lend on a fixer-upper.
To sell the house easily, request a cash offer from one of the best local companies that buy inherited properties fast.
3. Tax Implications
If you’ve inherited a house from an estate worth more than a certain amount, you could be facing federal estate taxes.
And let’s say the estate is cash-poor — you might have to sell the property just to pay off Uncle Sam.
Plus, state estate or inheritance tax on property might also apply, depending on where the property is. Talk about a financial headache!
There is also a capital gains tax on sale of deceased parents’ home (and here is how to avoid paying capital gains tax on inherited property).
You will also have to value house contents for probate purposes. These could be taxable, too.
While selling an inherited home requires you to pay capital gains taxes, there’s a silver lining.
When you inherit a property, it’s usually assessed at its current market value rather than what it was worth when originally bought.
This is like hitting the reset button on the property’s value. Why does that matter?
If you sell, this could save you a ton on capital gains taxes, since you’re only taxed on the increase in value from the time you inherited, not from way back when it was first purchased.
When it’s time to file for tax reporting, refer to our guide on how to report the sale of an inherited home.
Main Takeaway
It’s important to understand that inheriting a house isn’t just about getting the keys; it’s a whole bundle of financial obligations. Think mortgages, property taxes, upkeep costs — the works.
And often, you’re not the only one in the picture; there might be siblings and relatives involved. A bit of friendly advice: get everyone on the same page early to avoid future headaches.
