Over the next few decades, roughly $124 trillion in wealth will shift into the hands of individuals. However, a significant portion of real estate in the United States, potentially amounting to billions, may not reach the heirs it was intended for.
This issue isn’t stemming from market fluctuations or poor financial decisions. Rather, it largely results from the absence of wills, which experts argue poses a more serious issue than many recognize. This gap could jeopardize what is anticipated to be one of the biggest wealth transfers in history.
During a meeting at the Urban Institute, housing experts noted that, although some states have enacted laws recently, there is still a lack of awareness surrounding the problem.
With the ongoing transfer of wealth, at least $2.4 trillion in assets could soon belong to American Millennials and Gen Zers within the next decade. Moreover, another potential $25 trillion might be utilized for real estate. This doesn’t even account for the tens of trillions belonging to individuals without heirs.
“The lack of a will is definitely sending a family to chaos,” remarked Ryan Thomson, an associate professor at Auburn University focused on inheritance issues.
Disputes over inheritances can also become a financial burden for families. Legal battles over inherited property can consume significant resources. Despite all wills needing to undergo the probate process, experts anticipate that this will face its own set of complications.
Risk to Major Wealth Transfers
Quantifying the issue is challenging. The U.S. Forest Service’s Southern Research Service estimates that in just eleven Southern and Appalachian states, around $42 billion worth of wealth across approximately 5.3 million acres might not find its heirs. Fannie Mae’s Housing Assistance Council has put the value around $32 billion, but this only pertains to properties with assessed values.
Thomson pointed out that disputes over succession, often seen as a rural concern, have now become a broader issue, particularly as real estate represents a significant portion of family wealth. For example, estimates in Philadelphia indicate that 10,400 properties valued at $1.1 billion could be in limbo. In Detroit, around 5,500 properties worth $268 million could similarly face challenges.
Real estate sales affected by inheritance disputes are frequently overlooked in many areas. Yet, a troubling trend is emerging. Individuals who unexpectedly gain home equity following a parent’s passing often find themselves dealing with chaos, unexpected tax liabilities, and other costs.
This is where complications begin. In many parts of the U.S., real estate is generally held in “joint tenancy,” meaning heirs receive equal rights to the property. Consequently, the property loses owner deduction benefits, and heirs become financially responsible for taxes. If disagreements arise over the property’s future, it can lead to prolonged legal battles that are costly.
Unfortunately, “predatory” investors sometimes capitalize on these situations, purchasing properties for much lower than their actual value. They can acquire a small share from one family member and push for a forced sale.
However, further investigations into these matters are complex, as vulnerable communities are often targeted by investors and speculators.
Progress in Heir Laws Across States
So far, 26 states, along with Washington D.C. and the U.S. Virgin Islands, have enacted laws regarding property inheritance. Five additional states are considering similar measures, as reported by the Uniform Law Commission.
These laws introduce due process protections, including notice and appraisal requirements. However, Thomas Mitchell from Boston University notes that various legal issues can still complicate properties after the owner’s death, thereby jeopardizing the generational wealth intended for heirs.
One of the most significant contributors to this dilemma is the lack of comprehensive wills and estate planning. A study from Boston University highlights that only 57% of people have a will, and this figure drops notably among individuals with less education and among racial minorities.
Mitchell pointed out that many individuals may not be aware of how to create a will. Often, intentions may simply go uncommunicated. For instance, about 68% of parents aged 55 and older have investable assets totaling at least $500,000 but may not have discussed how these assets will be managed by their adult children.
“A lot of people believe it all begins with family turmoil, but the real starting point is silence,” says Ashley Edwards, founder of AAA Probate Resources, which aids heirs. “Without a shared understanding of decision-makers, real estate remains in a precarious state.”
To mitigate these issues, real estate agents are encouraged to take proactive steps in assisting homebuyers to document their wishes regarding property succession, although it often requires multiple discussions to emphasize the necessity of this planning.
