What is Estate Planning
This is simply the process of arranging for an orderly transfer of your assets to the people you want to receive them, it involves identifying who you want to give your assets to and when, either in your life time or at death; but sometimes done after death).
Keeping your vacation home in the family
It’s nice to think about future generations enjoying your special place, but you need to give careful consideration to the different ways of keeping your family vacation home in the family. The best place to start is a conversation with the relevant parties, usually your children. Start by asking if they have interest in eventually owning (and maintaining) the property. Many families have run into trouble when parents either assume that their kids aren’t interested (and sell the property without any notice), or assume that their kids are ready and willing to take on the responsibility (when they either aren’t or don’t want to). Assuming that your children would like to take on stewardship of the vacation home, the next step is to figure out the best way to make that happen.
1. Make a clean break: Sell the property outright.
You can sell the vacation home directly to your children. This is a straightforward solution that increases your capital liquidity (which might be helpful) while freeing you from the burden of property taxes and maintenance expenses.
2. Have your cake and eat it too: Establish a life estate
In this scenario, you transfer the home to your children now, but are able to continue using it for the duration of your life time. Remember, however, that in this case the vacation home will still be included in your estate for tax purposes.
3. Let go gradually: Gift the property over time
If you’re not concerned about reaping any financial benefits from the sale of the property, you can gift it to your children. To avoid gift taxes of up to 40%, you can gift portions of the vacation home (up to the federal annual limit) over the course of multiple years. This does involve a little extra work with yearly appraisals, but you can use tax valuation discounts.
4. Take the formal approach: Establish an LLC
A Limited Liability Company (LLC) can be used to both reduce your taxable estate and give your children partial ownership of the home. So long as you retain a majority of the ownership at least 51% you can designate the rest to your kids while retaining the ability to make all of the important decisions about the property. LLCs are fairly flexible; they can be dissolved or updated at any time.
Estate planning for vacation homes
As we transition out of our ski houses and start thinking about our beach houses, it is as good a time as ever to review the options for holding and managing a family vacation home. While these properties can bring wonderful memories for families, they can also evoke stress and strain on family relations. There are several techniques available to help families organize and manage the family vacation home and to pass these homes to the next generation, these techniques are
1. An irrevocable trust.
This technique works well when a family member owns a vacation property and wishes to pass it to the next generation as a gift, all at once or in stages. When an irrevocable trust is used, the trustee of that trust, usually an independent person, will have control over the vacation home on behalf of the family member beneficiaries. This can be a good solution when the grantor of the trust wants to relieve the family members of the burden of managing the property. With this technique, the grantor should also contribute plenty of cash to the trust so that the trustee will be able to use that cash to maintain the property indefinitely for the benefit of the family.
2. A Limited Liability Company (LLC).
This technique works well when a group of family members already owns the property together. Each family member contributes his or her interest to the LLC, and each family member has a corresponding ownership interest in the LLC. The LLC operating agreement, the terms of which have been agreed upon by the family members, will govern the management of the property. A manager of the LLC can be appointed to make the daily operating decisions, but the family member owners will have a say in larger decisions, such as renting or selling the property. The family members will also contribute proportionately to an LLC bank account, which will be used to cover everyday expenses.
3. A qualified personal residence trust
This technique (also known as a QPRT) is best used for a family member who wishes to make a gift of real estate to family members at a discounted value for gift tax purposes, but who also wishes to retain use of the property for a period of years. The gift tax value of the property is reduced using the QPRT technique based on the grantor’s life expectancy and the number of years he or she wishes to retain use of the property. The longer the term, the larger the discount. At the end of the term, if the grantor survives it, the property will pass to the designated beneficiaries. The grantor may continue to rent the property from the beneficiaries if all parties agree once the term ends.
Each of these techniques is unique, and each can be effective in the right circumstances to hold the family vacation home, resolve family issues and potentially save gift and estate tax.
Get Help
If you would like to learn more about vacation homes in estate planning, please contact any of our estate planning attorneys today.
