A family vacation home offers an escape from the stresses of everyday life, and an opportunity for bonding. Parents return to their vacation homes year after year, creating memories with their children and grandchildren. If you are part of such a family, you know the importance of passing on this tradition. A carefully constructed plan, with assent from children, can help make a seamless transition, and potentially reduce estate taxes.
The plan should address: (1) intended development or preservation of the property; (2) ownership of the property now and in the future; (3) use of the property (by whom and how often); (4) management structure and succession; and (5) allocation of expenses for maintaining the property. Your team of legal, accounting, insurance, and financial advisors can assist in creating your plan and developing an effective implementation strategy.
In this environment of appreciating real estate values and rising interest rates, you may be able to use a Qualified Personal Residence Trust (“QPRT”) to pass the vacation home to the next generation while reducing estate tax exposure. A QPRT is an irrevocable trust. The grantor transfers residential real property to the trust, retaining the right to reside in the home for a period of years. At the end of that time, the property will be held in trust for grantor’s children or distributed outright to the beneficiaries. The value of the retained term of years is deducted from the total value of the property to determine the taxable gift to the children. If the grantor wishes to continue using the property after the term of years expires, she may lease the property from the trust. The rental payments are additional transfers of wealth to the next generation that are income to the trust, but not taxable gifts.
If estate taxes are not a concern, a limited liability company (“LLC”) to hold the vacation home may suffice. An LLC can make it easier to divide the property among your children and grandchildren. It can also provide a management structure to ensure maintenance of the property, and to determine the schedule for using the property, especially in peak seasonal times.
The family vacation home can be an invaluable legacy. Contact your team to make a plan.
Michael L. Wear, AEP®, is a Trusts & Estates partner at Buckingham, Doolittle & Burroughs, LLC. Contact Mike at 330.258.6424 or mwear@bdblaw.com.
