You’ve inherited a large house. Now what? If you keep it, the costs will add up quickly. In fact, some people find they can’t afford to keep inheritance assets like houses, boats, or horses. If you find yourself in that situation, you have several options.
When Inheritances Become White Elephants
A white elephant party usually involves the exchange of low-cost, sometimes humorous gifts, but the original white elephant was anything but low-cost.
According to Investopedia, the term comes from an old tradition in Siam (now Thailand), where the monarch would give white elephants as gifts. If the recipient didn’t also receive the land needed to provide for the elephant, the animal would become a money pit. In this way, any burdensome possession can be considered a white elephant.
Sometimes, inheritances end up becoming white elephants.
- You inherit a large, old house in an expensive area. There’s no mortgage, but the property tax and insurance costs are extremely high, and it looks like the house will need a lot of expensive maintenance. You don’t have the cash to cover these costs.
- You inherit a boat. You’ve also inherited the mooring costs for the boat, and the marina requires you to maintain insurance. These expenses could make your budget uncomfortably tight.
- You inherit several horses. They were your aunt’s pride and joy, but with their high stable costs, they could end up eating you out of house and home.
Depending on where you live, you may also owe an inheritance tax. An estate tax is owed by the estate, while an inheritance tax is owed by the heir. There is no federal inheritance tax, but according to Kiplinger, six states impose an inheritance tax: Iowa, Kentucky, Maryland, Nebraska, New Jersey and Pennsylvania.
If you inherit cash, paying an inheritance tax is a fairly simple matter – you just need to remember to set aside the funds before you spend everything. If you inherit a house or other nonliquid asset, paying the inheritance tax can be harder if you don’t have enough cash. You’ll end up with a tax debt, and you’ll need to find a way to pay it.
What Should You Do If You Can’t Afford to Keep an Inheritance?
If you’re inheriting an asset you can’t afford, you have a few options.
- Reject the inheritance. You don’t have to accept the inheritance. However, if you decide to reject the inheritance, make sure you file the necessary paperwork to disclaim the inheritance in your state. Otherwise, you could end up liable for taxes.
- Sell the asset. This can seem like an easy way to turn a costly asset into cash, but complications are possible. For example, if you and your siblings inherit a house as coheirs, the situation can become difficult if some want to sell and some don’t. You may also owe taxes.
- Find a way to monetize the asset. For example, if you inherit a house, you could rent it out. This strategy can allow you to keep the asset while making money, as long as you can manage the taxes and other associated costs.
Proactive Estate Planning Can Help You Avoid Problems
When someone bequeaths a house or other valuable asset, they typically expect that the item will be cherished. Unfortunately, that’s not always the case. Some inheritances can become burdens and lead to stress and family feuds.
With proactive estate planning and some frank conversations, you can avoid these outcomes.
- If you are planning to leave a house, boat, or other high-maintenance asset to someone, make sure that person is ready and willing to take responsibility for it. It may be necessary to include a trust or life insurance policy as part of your estate plan to help the beneficiary with the costs, especially if you want the asset to stay in the family instead of being sold.
- If a loved one has told you that you’re going to inherit a high-maintenance asset, be realistic about your ability to cover the associated costs and time commitments. If you don’t think you’ll be able to do it, consider being honest about this so the other person can plan accordingly.
Will your estate plan lead to unexpected problems? There’s a lot to consider when crafting an estate plan. An estate planning attorney can help you plan for various scenarios. Contact Skinner Law.