The Inheritance Equalizer: Using Life Insurance to Keep the Family Home in the Family

Managing the transfer of a family home is likely one of the most emotionally charged and financially complicated things a senior will experience. The house is often much more than just an asset, it is also a memory repository and a symbol of the amount of hard work and dedication a family has put forth over the course of decades. As such, when a person dies and leaves behind a single piece of real estate to multiple heirs, the emotional investment that is inherent in a home can immediately become a point of contention and lead to family discord. Furthermore, if a senior does not have a well-developed strategic plan, the very home that he or she hopes to maintain may ultimately be sold off due to sibling heirs’ desire for cash.

The Real Estate Inheritance Problem

Many seniors have their wealth tied up in their homes. Although this represents a great deal of financial success, it often creates a “liquidity crisis” for the estate. For example, if a senior has three children and his/her only large asset is a $600,000 home, then how does he/she distribute that among the children so that everyone receives an equitable share? With out a child having sufficient funds to purchase out the other children, the home must be sold. Unfortunately, this is a common circumstance that often blindsides families

Keith Sant, founder and CEO of Kind House Buyers, has seen the effects of these kinds of circumstances first hand.

“With multiple heirs inheriting a single property, the complexities and emotions involved can quickly escalate,” Sant noted. “We see families being forced into a ‘fire sale’ due to the fact that the estate is not liquid enough to pay the other heirs who are unwilling to be landlords. Absent from life insurance that could serve as a buffer, the home — intended to be a gift — becomes a burden for the family that results in the quick sale of the property to simply resolve the books.”

The “fire sale” situation described above is exactly what many seniors wish to avoid. Seniors generally want the home to remain in the family and possibly for a child that has resided in the home or a grandchild that will need a stable place to begin. However, absent some method of distributing the assets equally among all heirs, the law will dictate that the home be sold.

How Life Insurance Works as an Equalizer

The “Inheritance Equalizer” is a strategy that involves a senior purchasing a life insurance policy that is designed to equitably distribute assets. A senior can use a life insurance policy to leave the home to one heir and a cash death benefit to the other heirs.

A Practical Example:
Let us assume that you have two children named John and Sarah. John wishes to retain ownership of the family home (valued at $500,000) and Sarah resides in another state and has no interest in the property.

The Problem: If you were to leave the home to both children, John may not have the ability to purchase out Sarah’s interest in the home.

The Solution: You purchase a $500,000 whole life insurance policy that names Sarah as the beneficiary. You name John as the owner of the home in your will.

At your death, John inherits the home and Sarah receives the proceeds from the life insurance policy. Both children receive an equal inheritance, and the property remains in the family. This simple solution to a complex problem eliminates the potential for negotiation or financing during a difficult time of loss.

Preserving the Family Hub

Real estate is far more than just an entry on the bottom line of a balance sheet. Real estate represents the physical epicenter of a family’s history. Preserving the home as a family keeps alive the family history and continuity that cash alone can never replace.

Matt Little, founder and managing director of Festoon House, emphasizes the importance of preserving the long term viability of the family home through financial planning.

“A family home is the ultimate legacy, but it takes more than just sentiment to make it last through generations,” Little said. “Using life insurance to create liquidity, for example, enables the next generation to maintain the home as a safe-haven for family memories instead of being forced to choose between those memories and their financial necessities. By paying the cost of the ‘buy-out’ upfront, you enable the home to continue serving as a maintained hub for the family, rather than a distressed asset that is liquidated upon the first indication of probate-related distress.”

As stated previously, the view of Little reinforces the idea that life insurance is not just a death benefit. Rather, it serves as a “home preservation fund.” Life insurance provides the needed capital to pay property taxes, maintenance, etc. to the other heirs without encumbering the equity in the house.

Navigating the Probate and Tax Maze

After a senior passes away, the estate usually goes through probate. Probate is a court supervised process that can take anywhere from several months to years. Regardless of the timeframe, the house still needs to be insured, heated and maintained. If the estate is “cash poor”, the executor of the estate may need to sell the house to cover the fees of the lawyers and utility companies.

The Function of Immediate Cash

Payouts from life insurance policies generally bypass probate. Therefore, your beneficiaries should expect to receive the cash payout in a matter of weeks and not years. The immediate access to cash can be utilized in various ways including:

To Pay Off the Remaining Mortgage: To ensure that the home is owned free and clear.

To Cover Estate Taxes: To prevent a tax lien from being placed on the property.

To Fund Repairs: To improve the livability of the home for the heir who is retaining the home.

By using life insurance, you are essentially “paying ahead of time” for the costs associated with the transfer of the real estate. You are eliminating the financial conflicts that often result in family disagreements.

Step-by-Step Instructions for Creating Your Equilibrium

If you are a senior homeowner, the following is how to begin establishing your estate protection plan related to real estate:

Obtain a Formal Appraisal: You cannot equitably distribute what you have not formally appraised. Hire a professional to establish the present day value of your home.

Speak with Your Heirs: This is the most critical step. Ask your children which one actually wants the house. You may be surprised to find out that the child you assumed had the desire to retain the home actually prefers to have the flexibility of cash.

Select the Correct Policy

Whole Life: Provides guaranteed payment as long as you continue to pay premiums. Suitable for lifetime inheritance planning.

Universal Life: More flexible in premium payments, and can be adjusted based upon the changing value of your home.

Second-to-Die: If you are married, this policy pays out after the second spouse dies, and that is when the real estate transfer generally takes place.

Coordinate with Your Will: Make sure your life insurance beneficiary designations align with the intent of your will or trust. If the two conflict with each other, you will likely invite a legal dispute.

The Emotional Benefit

Beyond the math, the biggest benefit to this strategy is the peace of mind. Knowing that your children will not be arguing over a “For Sale” sign in the front yard is a big weight lifted. You are giving your children the gift of a smooth transition.

Life insurance allows you to be fair to all of your children without being “equitable” in a manner that forces a liquidation. You can reward the child that assisted you in your final years by staying home and caring for you with the property, while still providing a significant financial legacy to the other children.

Conclusion

Real estate and life insurance are the two legs of a strong senior estate. When used together, they eliminate the problems of “lumpy” assets and provide a legacy for your children that is built on harmony and not hardship. Using the “Inheritance Equalizer” strategy, you will protect your most valuable tangible asset and your most valuable intangible asset — the love and unity of your family.