Your Home Would Be a Terrible Inheritance for Your Kids

Smiling homeowners sit on the front porch of their house together.

(Image credit: Getty Images)

last updated 27 September 2023

Somewhere along the way, homeowners came to believe a non sequitur of sorts, that the "American Dream" includes not only buying a house but also passing that same home on to their children. And financial advisers have largely supported this tactic for passing along generational wealth.

But here's an unspoken truth: Houses make for terrible wealth transfer vehicles. To bequeath a house is often to pass along financial burdens, red tape, home maintenance responsibilities, potential family conflict and housing market volatility. If you're thinking of leaving your heirs your physical home, it's a good time to reconsider this conventional wisdom, because there are much more effective alternatives to secure your legacy and pass along assets to the next generation.

The National Association of Plan Advisors estimates that the multigenerational wealth transfer will total $84 trillion through 2045. While $11.9 trillion of this sum will be donated to charities, $72.6 trillion in assets will be transferred to heirs.

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Communication about plans is critical

A study from Money & Family found that 68% of homeowners plan to leave a home or property to heirs, yet 56% haven't told them about their plans. That's a problem that will likely be a surprise to the recipient(s), who may or may not want or be able to service an inherited home. And even though homeowners wish to pass along their houses, 40% said they have some level of concern about leaving behind real estate, including worries that heirs won't be able to afford the upkeep and taxes and potential conflicts among heirs. Some also worry that the home will be sold quickly, against their wishes. And there is good reason to be concerned.

If you bequeath a house to an heir or heirs, they will have to make an immediate plan for home maintenance, mortgage payments (if necessary), utilities, property taxes, repairs and homeowners’ insurance. Zillow estimates this can amount to as much as $9,400 per year, which doesn’t include mortgage payments. If the plan is for heirs to sell the home, there is the listing and sale process, realtor fees, tax issues and the fair and equitable disbursement of proceeds among family members. That's a recipe for disaster, as many families can attest to.

Given the challenges that come with passing along a home to heirs, why do Americans believe this is a good idea in the first place?

The psychology of the home

Owners often have deep emotional attachments to their homes. So, when people gift their homes to children and heirs, they're not just giving an asset — they're endowing them with all the good memories that were made on that property.

Psychologist and author Dr. Ann Buscho writes that emotional connections to the home can be nearly as powerful as a strong attachment to a living being. After all, love, memories, dreams and experiences helped transform simple bricks, wood and plaster into a vibrant, living home.

Understandably, emotional ties can complicate decision-making when it comes to passing down a house to beneficiaries. Beneficiaries may struggle to make practical choices about the inherited property due to sentimental value. This emotional aspect can cloud judgment and hinder the effective management and allocation of assets. The field of financial psychology has been dedicated to understanding this irrational connection between emotions and financial decisions.

The financial burdens and family conflicts for beneficiaries

Inheriting a home entails a range of financial responsibilities that can quickly add up. Property taxes, insurance premiums, ongoing maintenance costs and unexpected repairs can significantly strain beneficiaries' financial resources. If beneficiaries already have their own homes, inheriting an additional property can exacerbate financial burdens and potentially hinder their own financial goals, retirement plans and aspirations. Moreover, the passing of a family member can sometimes lead to conflicts among heirs, potentially exacerbating existing fractures in relationships among siblings and other family members.

According to a 2018 study by EstateExec, 44% of respondents had experienced family strife during an estate settlement. Disagreements can quickly escalate, causing tension, straining relationships and even resulting in lengthy legal battles.

How home equity can alleviate legacy planning problems

One solution to the costs, complexity and drama that can sometimes accompany the handing down of a house is to take the home out of the equation. Tapping into home equity through a reverse mortgage is one way to streamline an inheritance. Homeowners can access their housing wealth, put it to work today and ensure they're leaving behind cash that will truly enrich the next generation. After all, it's much easier to divide a bank account than to manage and divide a four-bedroom Craftsman on an idyllic cul-de-sac where both children and grandchildren took their first steps.

Reverse mortgages help remove emotion from the equation so families can keep focused on the true goal of passing along generational wealth, without complexity, without conflict. Of course, there are many pros and cons of a reverse mortgage.

It should be noted that heirs who inherit a home with a reverse mortgage still have some short-term obligations, like how to pay off the loan, whether that is through refinancing, selling the house or other potential options. In this interim period, they are required to maintain the home and pay property taxes and homeowners’ insurance and other associated costs.

While houses hold sentimental value, it is crucial to consider the practicalities of passing on physical homes to family members and heirs and what other options might exist to move wealth from one generation to the next. Reverse mortgages provide an option worth considering. And the benefits could truly contribute to a legacy of riches.

Disclaimer

This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

Kristen Sieffert is a purpose-driven leader, passionate about finding ways to inspire others to dream bigger and create the lives of their dreams. In her current role as president of Finance of America Companies Inc., Kristen is committed to helping seniors live their retirement years with financial flexibility by putting the home at the center of the modern retirement.