Why Inheriting the Family Home Can Be a Bad Idea

by | Oct 16, 2023 | *Financial Awakenings, Cash Flow, Estate Planning, Fee Only Financial Planning, Giving, Real Estate, Tax Planning, Weekly Column

For many of us, our home is more than just a piece of property. It holds deep memories and emotional meaning, especially if we raised our families there. For this reason, estate planning discussions often include leaving the family home to the kids.

This can be a way to keep the property so family members can continue to enjoy it for generations to come. It also can be a burden. Preserving the physical space that produced those family memories comes at a financial cost.

An article on this topic from Kiplinger, published September 27, 2023, recently caught my eye. The headline was “Your Home Would Be a Terrible Inheritance for Your Kids.” The authors declared, “Houses make for terrible wealth transfer vehicles,” citing both financial costs and potential family conflict.

As a former real estate agent and an investor in real property, I can think of worse things than real estate to leave your kids—such as nothing. Still, there are some downsides to consider before including the family home in your will.

One of the biggest is the expense for upkeep. One client couple wanted to leave their beautiful Black Hills home to their kids jointly as a vacation home. I suggested they discuss the idea when the family gathered for Christmas. I added up the annual costs to maintain the home, including taxes, so they could ask the kids if they were prepared to cover their ongoing share. At our next client meeting I asked how the discussion had gone. “Oh, we can forget leaving them the house. When they saw the cost of upkeep, they all said it would cost less than half that amount to stay in hotels when they visited the Black Hills.”

Another downside of leaving property to multiple heirs is potential conflict. They may have different financial needs or disagree about what to do with the property. It is also wise to consider that you may need to sell the family home to provide for your own needs as you age.

On a positive note, real estate can be a valuable asset that could provide an heir with financial security if they can use the house as a residence or have the skills to become a landlord. Owning rental real estate is a business that requires time and knowledge to manage.

There are also tax benefits associated with bequeathing real estate. For example, the heir may be able to claim a step-up in basis, meaning that the value of the property for tax purposes is reset to its fair market value on the date of your death. This can reduce the amount of capital gains tax owed if the heir sells the property in the future.

If you’re concerned about the downside of leaving real estate to heirs, there are a number of possible alternatives.

If you own a significant amount of real estate, you could put the property in trust and let a professional trustee manage it and distribute the cash flow to heirs. Trusts can be complex and costly, so it’s important to work with a financial planner and an attorney to create one that meets your needs.

You could also sell the property during your lifetime and leave the cash to your heirs. Or you could potentially save capital gains tax by instructing your executor to sell the property upon your death so the step-up in basis would apply.

Legacy wishes about the family home are often more emotional than financial. Exploring those emotions can help find a solution that leaves heirs the gift of family memories without the burden of financial complications.

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