What to Do When Inheriting a House With Siblings

A home can be a magnet that brings generations together, but when the original generation of owners pass away, the property can sometimes drive families apart. Inheriting a house with siblings triggers a family discussion about whether to share the property or dispose of it. When siblings don’t agree, a buyout may be the most viable option.  

Fortunately for Bill Ringham, director of private wealth services for RBC Wealth Management in Minneapolis, he and his three siblings communicate well and amicably share the cabin their parents passed down to them decades ago.

“Our parents just assumed we'd all want to keep the cabin in the family, but I always think it's a fair question for parents to ask their kids whether they want the vacation home," said Ringham. “It was an eye-opening moment for me when I realized I love the cabin, but another sibling wasn't as excited about it. Ironically, that sibling really enjoys it now and is happy we kept it."

 

What Happens When a House is Passed on to Children?

The most important thing families can do when transferring or sharing property is to be transparent, otherwise they run the risk of ruining relationships, said Alma Banuelos, National Head of Trust and Estate services for City National Bank in Los Angeles.

Rather than assuming their offspring will amicably share a vacation home, parents can talk to their adult children and address issues in their will. For example, they can consider gifting property to children who want it and provide compensation with other assets for those who don’t.

When siblings inherit property together, they have a few options to consider. They can:

• Share it. If the siblings want to share the vacation home, they’ll need to divide the costs, such as property taxes, maintenance and mortgage payments.
• Keep it for income. Siblings can turn the property into an investment and split the rental income, but they will need an agreement to manage expenses.
• Sell it. If no one wants to keep the property, it can be sold with the proceeds split between the siblings. However, the siblings need to agree on who will prepare the home for sale and manage the transaction. In addition, a sale may generate a capital gains tax bill that should be shared among the sellers.
• Split it. If one or more siblings want the property but the others don’t, one or more siblings can buy out the shares of other siblings.

How well any scenario works depends on how well the siblings get along and communicate, as well as their financial standings.

 

How to Fairly Buy Out a Sibling From a Property

In some families, one heir may live too far away to use the vacation home with any regularity - or may not have the resources to contribute to its upkeep. If that sibling would prefer cash rather than partial ownership of the vacation home, the executor may be able to allocate other parts of the estate to him or her, in order to equalize the inheritance, Ringham said.

If the estate doesn't have liquid assets or there are not enough assets in the estate, the family members who want to keep the vacation home can buy out the other relative with their own funds.

“The siblings need to make sure they structure a fair price for the share of the property and may decide to use a couple of valuations," said Ringham.

How to Calculate Buying Someone Out of a House

When you inherit a house with siblings and want to buy out the shares of one or more of them, you’ll need to start with an accurate valuation of the property. Unlike a traditional appraisal, this valuation may include the contents of the property that are part of the inheritance, such as furniture, art, collectibles or a boat, along with the land and the house itself.

Families will want to hire one appraiser, or perhaps more than one for comparison purposes, for an accurate assessment of the inherited value.

Next, the equity in the house needs to be calculated if there’s a mortgage or other liens on the property. That equity needs to be divided into shares, based on the number of heirs, in order to calculate an appropriate buyout amount. The division could be in equal parts or in various percentages such as 40% and 60%, depending on the estate.

If the siblings don’t have cash for the buyout, they’ll need to obtain funding.

Ways to Fund a Buyout on Inherited Property

Multiple options are available for siblings who want to borrow the money to buy out their sibling’s share of a property. For example, one or more siblings can apply for a probate loan, an estate loan or an inheritance advance to pay their other siblings for their share of the property. However, the availability of these options depends in part on how the inheritance is structured.

Other options include a home equity loan or a home equity line of credit on the property, or a cash-out refinance, although these options may require specialized lenders.

“The siblings can also agree to accept a promissory note, in which both sides agree to the terms and interest payments," Banuelos said. “You need to consider what will happen if a payment is missed. If an interfamily loan is appropriate for the family, to avoid animosity between the siblings, you may wish to consider an outside agent to collect the payments."

No matter how the buyout is funded, it’s important that the deed of ownership is legally transferred to the new owners.

 

Additional Options When Inheriting a Home

If buying out the house is not the favored option, siblings can choose an alternative solution to an inherited house with multiple owners.

Sell and Split the Profits

Siblings who inherit a house together each have a right of first refusal on the sale at the value established by a professional appraisal. A sale can be the simplest solution if none of the heirs want a vacation property. Even if they agree to share the house at first, Banuelos recommends establishing a written agreement governing the conditions of a future sale, including whether the price would be based on current market value at that time.

“They should agree about who has the right of first refusal, such as whether it's limited to immediate family members or extended family," said Banuelos. “Or they can develop a limited list of buyers."

Rent and Split the Profits

If siblings want to turn a house into an investment, Ringham suggested creating an LLC that holds title to the property with rental income flowing through the business. A written partnership agreement that establishes whether the tenants can include long- or short-term rentals and outlines a process for making decisions and sharing expenses should be in place. Banuelos recommends hiring an independent property manager to minimize disagreements and handle routine maintenance.

Share the House with a Formal Agreement

Sharing a vacation house with siblings can be easier with a partnership agreement to reduce conflict.

“A formal agreement may be necessary as the next generation inherits the property, because instead of a couple of siblings, you start to have multiple cousins and their families sharing the property," said Ringham. “In our case, if we all gift our share of the vacation home to our children, we'd go from four owners to nine owners."

The agreement can establish rules about who uses the property and when, how many guests are allowed, cleaning protocols, and whether the vacation home is rented to non-family members.

Other elements to establish include:

• A maintenance plan. Some families pay a property manager while others schedule discussions about maintenance and repair issues. A property manager can facilitate decisions and identify contractors for repairs, which can limit family conflict.
• Governance. Sharing a vacation property generates responsibilities and ongoing decisions about finances, upkeep and use of the home. A formal process for these decisions that functions like a condo board can reduce emotional conflicts and may be especially important among siblings who don’t always get along.
• An expense account. An expense account with regular contributions from the siblings can fund routine cleaning and maintenance as well as capital improvements such as a new roof or upgraded landscaping. Determining an annual budget can reduce ongoing contentious conversations if siblings disagree about spending on the home or have different financial circumstances.

Partition Suit

If family members who inherit a vacation home cannot agree, a last resort is a legal request to partition the asset. In that case, one or more siblings goes to court for instructions about what to do with property.

If an estate has an independent trustee who is not a family member, that person may have the authority to sell the property, Banuelos said. If the trustee is one of the siblings, getting a judge’s blessing to sell the house removes liability for the trustee for that choice, she said. But legal action can be expensive.

“There's little advantage to prolonging the issue through the courts if there is an informal method to resolve the conflict," Banuelos said.

 

Prioritize Written Agreements

Managing an inherited home can be complex.

“It's best to formalize an operating agreement as soon as possible after an inheritance to get ahead of future conflicts while everyone is getting along," said Ringham. “Siblings will be much better off if they agree on how they'll handle usage, maintenance and future transfer options before someone's unhappy," he added.

Given the complexity and number of options available when gifting or inheriting a home, it's important to consult with professionals every step of the way.

City National Bank's wealth planners can help you create a plan to help ensure an inherited property continues to be a source of joy for your family.