Life is so fascinating. You inherit money, or you get a divorce, and you assume that the experts handle everything properly, and sometimes they do.
And, sometimes they don’t.
Here are a number of examples for you, so you can see if your attorney or the executor of your estate handled the Estate properly, or lacked the depth of knowledge to settle it without major errors.
The base of this example is easy. Four kids, one Estate. Settled equally between the four.
Value of the Estate is $1,200,000, which is, using simple math, a value of $300,0000 to each.
Since Estates, currently, that are valued below $5 Million are tax free, this should be an easy example.
But is it? Certainly not. Read and learn.
The Estate is all cash. Each heir receives $300,000. Simple and easy. In a trust, in a bank, it matters not. The cash is available and completely liquid.
The Estate is cash and a house to sell. An old family house, with memories and 150 sweaters to be distributed, and more memories.
The house is sold, the net proceeds from the house are divided by 4 and the Estate is settled. The Estate is no longer valued as exactly $1,200,000 because the sale of the family home cost $22,000 to sell, and therefore every heir receives their share of the “new” or Net value of the Estate. Or, in this case, the actual value of the Estate,. $1,200,000 minus the $22,000 to sell the family home, and minus another $11,000 in selling expenses, due to the condition of the home. The Net Value of the Estate is paid equally to all of the heirs, and no one complains. No one complains, because that is the amount of money left to the heirs. The Estate minus the cost of selling assets that are not liquid.
The Estate, in that simple case, has an actual value of $1,167,000, which is divided by 4 and distributed. Or, a value to each heir of $291,750. The $300,000 expected value is reduced by the cost of selling the family home, and no one complains because it is still an equal division of the Estate. Everyone knows that the value of Real Property is subject to the selling costs, and often at a negotiated price that is different than the appraised value.Pretty simple.
The Estate consists of a house and a rental property, that one heir is receiving as part of the will. The rental is worth $280,000, and that heir receives the $280,000 value of the rental plus $20,000 in cash, and the other heirs receive $300,000. Simple and easy. A fair settlement.
Wait, not so fast. The rental is not a cash value item. It is a net value, which would be the value of the sale, minus the costs of selling real property. Those costs are approximately 8%. So you would subtract the 8% from the value, arrive at the actual net value of $257,600, and distribute based on that net value of the rental.
The family home would be sold, and the heirs would receive their share of the Estate, which would be reduced by the selling costs of the family home.
The rental would be “sold” theoretically, and the heir receiving the rental would receive the rental valued at $257,600, and then receive the balance of the Estate with his 1/4 share being the $1,167,000 divided by 4 MINUS the value of the rental based at $257,000.
$291,750 as that heir’s part of the Estate, subtracting out the net value of the rental, for a cash settlement to that heir of $34,150.
Every heir receives a value of $291,750.
One heir receives it as a check for $34,150 and a rental property, and the other heirs receive the $291,700 each.
A perfect and equal split of the Estate.
Let’s look at doing this the wrong way. The heir receiving the rental gets $280,000, plus his share of the estate, $291,750 minus the cost of the rental, which gives him $11,750. He then sells the rental, and ends up with the actual net proceeds from that sale, or $257,600. That heir has received an actual Net Value, of only $268,350.
The heir receiving the rental property received, in the settlement of the Estate, $268,350. The other heirs received $291,750 each. That is inequitable by the amount of $23,500. Not so simple any more. It is no longer simple, and the math is quite difficult.
You can see how incredibly complicated this can be, and the concept is certainly more than most people can understand. It is also very complicated to calculate and to make a fair and equitable settlement. But, to not consider the costs of selling real property is to be patently unfair to one of the heirs in the last example.
I will not even calculate this one, but I will explain the example.
Two parents leave behind 4 properties for four heirs. The properties are valued at $200,000, $300,000, $400,000 and $500,000. All are rentals, but the total value is still far below the threshold for taxable items in an Estate. So, the attorney settles the Estate at the values, and divides the cash in the estate between the heirs. All simple and over.
Except, some of the heirs were ripped off, and here is why:
The cost of selling the $200,000 rental is approx. $16,000.
The cost of selling the $300,000 rental is approx. $24,000.
The cost of selling the $400,000 rental is approx. $32,000.
The cost of selling the $500,000 rental is approx. $40,000.
So, as an example, the seller of the $200,000 rental received $24,000 more for his share, due to the executor failing to recognize that the selling costs are much higher on a more expensive property.
There are parts of an Estate that are valued at a gross value. Like cash, stock, and other items that can be sold at a low enough cost that they are considered liquid.
Other items, like Real Property, have very expensive selling costs, and they should be valued at their Net Value. The value minus the selling costs. It is fair and simple and equitable, and your attorney or your executor has probably never even though about it.
One more example before I go.
It is a divorce. The wife gets the house, value at $500,000 in the divorce. The couple owes $350,000, so the net value of the home is $150,000, which the husband gladly accepts half of as his part of the house.
All simple and easy. The divorce settles and everyone is happy. Well, everyone except the wife. She decides to sell in two months, and she realizes that she split the $150,000 equity with her husband, and now that she is selling that Gross value is now a net value, and she will only receive $110,000 in actual proceeds from the sale of the house. $40,000. She got ripped off for $40,000 because no one though of considering that the value of the house for the purpose of a divorce should include the selling costs.
It is not a liquid asset. It is an asset with a built-in cost to sell. And that is true whenever she sells, whether it is now or in ten years.
Think before you let your attorney or an executor make a mistake that costs you $40,000.
And yes, this happens every single day.
Enough for now.
When you do it right, nothing is easy.