Leaving property to children or grandchildren isn't always as simple as signing a will. Certain assets—like timeshares or business ownership—can complicate the process with unexpected tax, legal, or financial issues. If not handled properly, you risk costly mistakes that could diminish your estate and become one of the most surprising financial mistakes of a lifetime.
Here's what you need to know about the different kinds of property that can complicate an inheritance.
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Jointly owned real estate
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Whether it's a family home, a vacation property, or a rental investment, any real estate that is inherited by multiple people instantly becomes more complicated. There may be disputes about what to do with the property, whether that's to sell, renovate, or rent. There could be issues with paying for upkeep or taxes.
These situations can drive a wedge in sibling relationships, and should be considered before continuing the joint ownership.
Jointly owned real estate with rights of survivorship
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If a couple owns property together, and the surviving owner automatically receives full rights when one co-owner dies, it's called jointly owned with rights of survivorship.
It may seem straightforward, but the property can still be used to pay the deceased's debts, and co-owners cannot will it to anyone other than the surviving partner.
Community property
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You may own a piece of property solely in your name and be under the impression that you can leave it to your children directly. But, if you live in a community property state, then your spouse is automatically a co-owner — even if they're not on the deed.
That can complicate things if you intend for the property to go to heirs rather than a spouse.
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Homes with certain types of mortgages
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Depending on the mortgage type, your heirs may need to settle any remaining debt on the home. Often, the estate covers this, but if funds are insufficient, the inheritor must decide whether to repay the debt to keep the property.
This is usually required within six months and is most common with reverse or home equity conversion mortgages.
Timeshares
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Timeshares are notorious for lack of appreciation and difficulty selling, and if you're willing one to your children, know that you could be leaving them with a financial burden.
Maintenance fees may be higher than the use of the property is actually worth, and there may be other hurdles to selling the property that leave them stuck with it for years.
Out-of-state property
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Inheriting property out-of-state becomes a longer and more arduous process than simply inheriting a home down the street. While many properties have to go through probate, out-of-state inheritance involves a secondary level called ancillary probate.
This could involve hiring estate professionals — including attorneys — in both states, which quickly gets expensive.
Vacation homes
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To avoid the headaches (and taxes) of passing down a vacation home, some people take one of two routes: they either gift the home using a life estate, which lets them continue using it during their lifetime, or place it in a trust so it can bypass probate.
Business ownership
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Often, the taxes that come with transferring business ownership are what drive the heir to wish they could simply get out of the business altogether. Fortunately, there are ways to handle the inheritance so it's less of a financial burden on the inheritee. This could include deferring the tax bill or setting up a payment plan.
Collectibles
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If you've just inherited a large collection of baseball cards that you know are worth a pretty penny, you're probably as excited. But there's a catch: these assets could stick you with a large tax bill after selling.
Just remember, capital gains tax may apply to collectibles, just as it does to property.
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Bottom line
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Taking the time to set yourself up to make the right moves financially can pay dividends, whether it's paying attention to wise investments or timing the real estate market correctly. But this also extends to the decisions you make now that are designed for others to benefit from later.
Spend the extra effort to pay attention to tax implications and legalities as you're setting up your estate, and your children will thank you later.
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