An Inherited Home Isn’t Always a Gift: Why Nearly Half of Heirs Can’t Keep Theirs
The greatest generational wealth shift in history has already begun.
Baby Boomers, the largest retirement generation to date, will finish shifting up to $105 trillion to heirs by 2048. And according to a recent LegalZoom survey*, 62% of what will be left behind is anticipated to be real estate or property.
But rising home maintenance costs could pose a problem for younger generations.
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For instance, property values have increased “almost 27% faster than inflation since 2020,” per the Tax Foundation. And with higher home valuations, heftier property tax bills typically follow.
So will the inherited wealth be enough to support the higher costs of homeownership? Or will heirs need to sell priceless heirlooms to stay afloat?
Read on.
*Note: LegalZoom is an online legal technology company that surveyed 2,000 U.S. adults, including 1,000 Gen Z and millennials and 1,000 Gen X and baby boomers. Respondents were screened across various income levels.
Heirs may be unprepared for high property taxes and home costs
Per the LegalZoom survey, 42% of Young Americans don’t feel “financially prepared to keep and maintain” an inherited home left to them today. Among their top concerns when inheriting a house include:
- Property taxes. About 47% of potential heirs expect to inherit property, but 20% are concerned they won’t be able to afford the property taxes on the heirloom house.
- Maintenance costs. About 20% of young Americans are concerned about being able to maintain an inherited property after it’s passed down to them (which may include hidden home costs like home insurance and repairs).
- Property debt and legal complexities. Approximately 23% of future heirs are concerned about expensive surprises associated with a home. Mortgages, home equity loans, tax liens, and tricky legalities could intimidate heirs when inheriting a house.
So, while 62% of the older generation(aged 45 and above) surveyed by LegalZoom expect to leave behind real estate to their loved ones, only 18.6% of younger Americans in the survey actually feel “very prepared” to maintain an inherited property.
House-rich but cash poor?
Although inheriting a house may sound exciting, future generations may struggle to maintain a home left in the family will. And that’s not just because home costs are rising.
Other factors contributing to a “house-rich, cash-poor” mentality are generation-specific. For instance:
- According to a recent LendingTree study, Generation X may carry the highest median non-mortgage debt among other generations (including credit card debt, student loans, etc.).
- Millennials may struggle even more with outstanding loans. Over half have more debt than savings, according to a recent Bankrate report.
- Generation Z could face difficulty with overall financial stability. One Deloitte survey* found that 56% of Gen Zers live paycheck to paycheck.
Thus, instead of using an inherited home as a priceless heirloom, future generations may use that real estate to help them pay off debt, which may be disappointing news for those hoping to pass down a family home to be used by future generations.
*Note: Deloitte surveyed 14,468 Gen Zs from 44 different countries.
Start talking to your heirs now: Inheritance tax may be tricky
While talking about wills and estates with your heirs may be uncomfortable, it’s important to take the time now to discuss what the future looks like for your family.
Here are a few tips to get the sensitive wealth transfer talk started in your household:
- Ask your heirs questions about their financial situation. If you feel comfortable, you may want to broach topics like “What do you want your future to look like?” or “What are some of the biggest financial goals or challenges you have?” Creating a customized plan that works for all generations involved will help ensure you know how your assets will be handled after you’re gone.
- Be honest about your own financial situation. Do you still have any outstanding debts? How will taxes on your assets look for your heirs? According to the LegalZoom survey, over 50% of young Americans aren’t confident that they understand how inheritance taxes could affect their inherited wealth — you can help bridge that gap in understanding now.
- Discuss options. If your heirs aren’t very liquid, you may want to talk about the possibility of selling certain assets in the near future. You may also want to offer advice on which investments could be the best fit for their financial situation. Remember: some of the greatest wealth you can pass on to future generations is the wisdom you’ve learned through your own journey, and not just the assets themselves.
Overall, the most important component of family finance is ensuring that the plan works for everyone.
So if you haven’t had a conversation with future heirs about generational wealth, or are worried about taxes affecting your loved ones’ inheritance, make a plan to talk with your heirs and consult with a qualified estate planning or tax professional sooner rather than later.
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