Passing "BIG TICKET ITEMS" Fairly

For many Americans, their home is their (or certainly one of their) largest asset(s), and passing it on the next generation can be tricky. There are a couple of common scenarios that come up frequently dealing with “big ticket” items, which we’ll look at below. In general, items like houses will be seen by the estate beneficiaries in one of two ways. While the analysis applies to more than just houses, houses are the most common example and so from here on we’ll just refer to houses as the ongoing example. Houses are seen as either merely a store of value (i.e. – they’ll sell it as soon as its reasonable to do so) or one that also holds sentimental value (i.e. – some or all of the heirs will want to keep the house). How to deal with the house depends on this view, as well as the other asset of the estate.

1)      All beneficiaries see it as a store of value. This is the easiest situation, as you can leave the beneficial interest proportionally and let the heirs or your fiduciary sell the house and distribute the proceeds.

2)      All beneficiaries want to keep the house as a house. This is only slightly more complicated. You should consider how to pass the interest to the heirs. In Florida, if you own a fractional interest in real property, you have the right to sell to whomever and the “right of partition”, which is the right to go to Court and, under most scenarios, force the sale of the entire property at auction. So if you have heirs that don’t all get along (even if they all do want to keep the house as a house) or some that may not be as willing or able to financially contribute to the upkeep, or some that may run into financial trouble in the future and need the equity, you should consider alternatives to “my house to my kids”. One kid could sell his interest to a stranger (who could either enforce their right to stay in the house or partition it). This is one of many examples of what happens. Instead, if you leave the house in an LLC or a trust, you could “pre-set” the rules as to how to buy others out if they want/need to, how their share is handled in a divorce, or what happens to their interest if they refuse to pay their share of the upkeep. By doing a little more work up front, you’ve helped solve a lot of problems down the line and kept the house from ending up with freeloaders or people your heirs wouldn’t want to co-own property with.

3)      Some beneficiaries MAY want the house, and there is sufficient other assets to “make the others whole” (meaning they still get whatever percentage of the overall estate you wanted). As a simple example – you have two kids who will be equal heirs. One who wants the house (value - $500,000) and you have a bank account with $500,000 in it. At first glance it seems easy – the house to kid 1 and the account to kid 2. However, it may not be that simple. Has kid 1 thought through the financial costs of the house? Can kid 1 afford it? Does kid 1 really want the house or is it more of a “maybe I want it depending on the circumstances at the time?” Because the house – with a fair market value equal to the bank account – is not really an equal asset. Because there are upkeep costs associated with the house. And importantly – if that kid needs to sell the house they won’t end up with anywhere close to $500,000 after closing costs / commissions / etc. If you are in this situation, consider building in a discount to the value of the house, so that the economic value of what you leave your two kids (who you wanted to treat equally) are left economically in the same spot – or at least closer than they would have been with the simple 1 line bequest.

4)      Some beneficiaries MAY want the house, and there is not sufficient assets otherwise to make everyone whole. This is the hardest. Same two kids, but your bank account only has $250,000 in it. How can you leave this equally to the kids? The most common solution here lies in giving the kid to whom you’re leaving the house the time to take out a mortgage (or raise their own money) and pay off the other child. You would want to have all of this spelled out in your documents to protect both kids and keep either from being able to rush a solution that doesn’t reflect your intent.

There are numerous ways to address this situation, and the important thing is to have the discussion with your counsel so that you know your wishes will be upheld and that your desires are built into your documents. Emotions run high after a death under the best of circumstances and so helping your heirs avoid these pitfalls ahead of time will be much appreciated.