Inherited Real Property: Tips & Tricks

Inherited Real Property: Tips & Tricks by Tom Sciacca{Read in 8 minutes}  When someone dies in New York, it is not uncommon for a home to be an asset of the Estate. We could be talking about several different types of property. The most common that I see in New York are apartments, co-ops, condos, or a “brownstone” building, but every now and then New Yorkers actually own houses. They might be vacation homes, investment properties, or houses that they’ve inherited from other family members and have never bothered to dispose of in one way or another. These sorts of assets present special problems and concerns, so I thought I’d spend some time talking about them in this article.

First, it’s important to distinguish how a person inherits property. If a beneficiary inherits property under a Will, generally the Executor of the Estate is charged with managing the property after the death of the deceased, until such time as the Executor can transfer it to the ultimate beneficiary. This is usually done by a deed from the Executor directly to the beneficiary.

Often in situations like this, the Executors and beneficiaries clash over who is responsible for the upkeep costs of the property, which may include things like real property taxes, maintenance or common charges, utilities, homeowner’s insurance, etc. If a Will gives property directly to a beneficiary, the beneficiary is usually charged with all of the expenses related to that property, commencing on the date of death of the deceased. However, the converse is true as well. If the property is an income-producing property, the beneficiary is entitled to all of the income generated from the date of death.

Example:

Let’s say the deceased leaves the beneficiary a three-family house in Brooklyn. The beneficiary lives on the first floor and the other two floors are rented to tenants. Starting from the date of the decedent’s death, the beneficiary is responsible for all expenses related to the real property, but is also entitled to collect all of the rent.

As a practical matter, the Executor may handle the collection of rent and payment of expenses until such time as the Executor is ready to deed the property over to the beneficiary. However, there will be an equalization at that time, with the beneficiary receiving any net income after payment of expenses. This is important to note because when a beneficiary inherits an income-producing asset, the estate and/or the beneficiary may have some income tax liability.

Sometimes the Executor of an Estate will sell the real property, which presents special concerns of its own. When listing the property, there are many steps that an Executor can take to ensure that the estate receives the best price. Why might the Estate sell a property? First, the Will may direct the Executor to do so. For example:

I have three children, each of whom I want to inherit an equal share of my Estate. My largest asset is my home and I do not want my three children each inheriting a share in the home. Perhaps one of them needs money, or they do not get along, and if I name them as co-owners of the house, they will just fight into perpetuity. (If I planned to be an evil and sadistic ghost, this might be fun! But it’s not good estate planning…)

I might direct my Executor to simply liquidate the property and give each of them cash. That way they can all walk away without further entanglements.

Perhaps I am also concerned about the upkeep costs of the property. I don’t think any one beneficiary can handle those costs.

Maybe my home is a cooperative apartment. While I can leave the shares of stock to whomever I wish, the board reserves the right to determine whether or not my beneficiary will be approved as an owner. This may be problematic if my beneficiary is not financially secure in a way that inspires the board’s confidence that they can make the monthly maintenance payments.

If my Will directs the sale of a piece of property, my Executor is charged with doing so.

The rules are a little bit different when someone dies without a Will. Why? Because our laws in New York State provide that title (ownership) to real property passes automatically to next of kin upon someone’s death. This is to ensure that at any one time, the State of New York knows who owns the property. These are the people who are liable for paying the costs such as property taxes, utilities, homeowner’s insurance, etc.

Going back to my example above where I have 3 children:

If I die without making a Will, and I own real property, the title of the property automatically passes to them by operation of law. Each of them now owns one-third. If they don’t like being co-owners of the property, they can sell it together, or they might wind up in Court seeking a court Order to sell the property at auction. Any type of estate litigation like this can be exceedingly messy.

Unfortunately, every now and then people don’t clean up titles to real property when someone dies intestate. When a beneficiary — who’s a member of a future generation — tries to sell it, it may be problematic.

Example:

Let’s say now that instead of a parent leaving the real property to his children, a grandmother owns a three-family house in the Bronx. Several members of the family live there. When grandma dies without a Will, the title to the property passes automatically to her children — let’s say there are three of them. They may never bother to change title to the property because all of them are still living in the property, and even though the property tax bills are coming in grandma’s name, they still pay them, and the city still cashes the checks.

What happens when one of grandma’s children dies? Grandma’s grandchildren now inherit the share of their deceased parent, and instead of having three owners of the house, you may now have four or more. This can make it difficult to sell the property later, especially if the family has fallen out of touch or no longer gets along.

It’s often important to contact an attorney to discuss these real property issues after somebody dies, to ensure that there is no further trouble selling or mortgaging the property at a later date.

Finally, it’s important to note that for purposes of this article, real property does not include cooperative apartments. Technically, people who own cooperative apartments own shares in a corporation, one of the perks of which is to treat one of the apartments in the building like their own. That is not real property; that is stock. The language in this article relates only to land and condo apartments which are subject to a deed.

For more information on this topic, please contact me.

Thomas Sciacca

 

Thomas Sciacca

www.sciaccalaw.com
Tom@SciaccaLaw.com
(212) 495-0317