Billionaire Estates Time Bomb: Heir Disputes Threaten Transfer of America’s Greatest Wealth
In the coming decades, an estimated $124 trillion in wealth will change hands around the world—but tens of billions of dollars in US real estate may never reach their intended heirs.
The fault is not market volatility or bad investments. The absence of a will, experts warn, is a bigger problem than most people realize, and threatens to disrupt the largest wealth transfer in human history.
Housing experts gathered at the Urban Institute on Monday said some states have passed more laws in recent years, but there isn’t nearly enough education about the extent of the problem.
As part of the Great Wealth Transfer, at least $2.4 trillion in assets could end up in the hands of US millennials and Generation Z over the next decade. Maybe $25 billion could be put into real estate. That’s before the tens of billions in assets owned by people who have no heirs.
“The lack of wills sends the family completely to the wood chipper,” it said Ryan Thomsonassociate professor at Auburn University, who studies estates.
It can be an expensive job for families, too. Inheritance disputes can consume significant legal resources, such as the ongoing dispute over the New York real estate fortune of Sol Golman. But all wills have to go through the vetting process, and experts expect problems to catch many, many more along the way.
Threat of transfer of great wealth
Quantifying the problem is difficult. The Southern Research Station of the US Forestry Service’s Southern Research Station is estimated at $42 billion in land, on an area of up to 5.3 million hectares, can be owned by the heirs in 11 Southern and Appalachian states alone. Fannie Mae’s Housing Assistance Council estimates $32 billion nationwide, but that only counts assessed property.
Inheritance disputes used to be considered a village affair, Thomson said. But that is no longer the case with housing as a major component of family wealth. Boston College estimates there could be 10,400 buildings worth $1.1 billion in controversy in Philadelphia and 5,500 buildings worth $268 million in Detroit, for example.
Many jurisdictions do not prefer the sale of properties subject to heir disputes. But patterns emerged. Those who are stuck with unexpected home assets when their parents have already died face a storm of unexpected tax obligations and other costs.
This is where the problems begin. In most US jurisdictions, the property automatically changes to a “tenancy in common,” where the heirs receive equal interests in the property. The household loses its homestead exemption, and the heirs fall behind in the tax liability. If they disagree about what to do with the property, they can end up in court for years, costing legal fees.
That’s where “spearhead” investors come in and snap up properties for far less than they’re worth, says Thomson. They get a small portion of the property from one family member, and apply to enforce the sale.
But more research on this subject is pointless, explains Thomson, because those investors and speculators then use it to identify vulnerable communities.
Many states make laws about heirs inheriting an estate
Now, 26 states, the District of Columbia, and the US Virgin Islands have passed “Partition of Heirs Property Acts” and five more are considering them, according to the Uniform Law Commission, a policy think tank.
These rules add due process protections such as notice, arbitration, and right of first refusal requirements. But thousands of other legal issues could flood the property after the owners die, threatening the wealth they intended to leave to their children, it said. Thomas Mitchelldirector of Boston College Law School’s Initiative on Land, Housing, and Property Rights.
The problem stems from the lack of a detailed will or estate plan. A Boston College study found that only 57% of people had a will. And that number is much lower among people with a high school education or less, and ethnic minorities.
For some of these people, there is a lack of understanding of how to make a will, Mitchell said. But it may also be a simple matter of conflicting desires. About 68% of parents age 55 or older with at least $500,000 in investable assets have not told their older children what they plan to do with their wealth.
“Many think this starts with drama within the family, but it actually starts with peace,” it said Ashley Edwardsfounder of AAA Probate Resources, working with heirs in Georgia. “If there’s no shared understanding of who should make the decisions, you’re putting the asset in a vulnerable position.”
Real estate agents should be proactive in helping homebuyers document what they want to happen to their assets when they die, Edwards said. It usually takes a few tries to convince them of the need.
