Consider yourself lucky if your family owns a vacation home –a lakeside cabin, a beachfront condo–a place where parents, children and grandchildren can gather for vacations, holidays and enjoy each others company and relax together. Your vacation home is likely a place full of special memories where you or your children grew up enjoying summers and vacation weeks.
Estate Planning is particularly important for properties like these. In many cases, the owner wants to ensure that the vacation home remains within the family after their death, and not be sold as part of the liquidation of an estate. Family arguments about the future of a vacation home can drive a wedge in relationships if advance planning is not explored. Whether you’re contemplating the purchase of a vacation home and have questions about how to hold the title or you now own a vacation home and are thinking about giving it to your children, here are a few estate-planning issues to consider.
- Title Issues. You will need to decide how to hold the title of the vacation home. Options include: your own name, jointly with a spouse or child (generally not recommended), with rights of survivorship, or as “tenants in common”, or owned by a trust or limited liability company. There is not necessarily one correct answer and considerations may include the relationship between co-owners, what other assets the co-owners have in order to take advantage of the federal or state estate tax exemption amounts.
- Location of the Vacation Home. If your vacation home is in a different state than your primary home, the executors of your will may be required to go through a second probate proceeding in that state. Holding the home in a trust or LLC should be strongly considered as it can avoid additional probate in another state, saving your family time, money and aggravation.
- Vacation Homes in a Different Country. Owning real estate in a foreign country can be complicated because local laws vary significantly regarding the most tax-efficient way to title and structure ownership of the foreign property. Local experts in the country of ownership are the best resource for advice on this. You will want to ask your local expert about any restrictions regarding the disposition of property upon your death and the country’s estate or inheritance tax requirements. Some countries don’t allow you to choose who inherits the property, and instead mandate that a surviving spouse and children inherit it in set percentages. In addition, many countries do not recognize trusts, which means if you leave your foreign vacation home to a trust for the benefit of your family, local law may disregard it and the property may pass to other beneficiaries under your Will. Since foreign laws governing wills are often very different from U.S. laws, it is recommended to have a separate Will prepared by a local lawyer to ensure these assets are properly planned for. Finally, if you are a U.S. citizen or resident, your worldwide assets are subject to U.S. estate tax and foreign vacation home (and its contents) may also be subject to that country’s estate or inheritance tax.
- Gifts of Vacation Homes. You can give your children (or someone else) all of your vacation home or only partial interests in it; you can make outright gifts or gifts in trust; you can place your home in an LLC and then make gifts of those interests. The tax cost basis of the vacation home when gifted will be the same as your basis, plus the amount of any gift tax paid. If you pass away when you own the vacation home its basis would be stepped up to fair market value.
- Vacation Homes in the Family for Multiple Generations. In addition to structuring the gift appropriately, you may want to create a written agreement for your heirs to minimize the likelihood of disagreements. The agreement can be completed and signed by the heirs as a part of the gift process and can include rules for the use and operation of the property. If your family has already inherited a vacation home without having an agreement in place, you should work together to create an agreement in advance of one being needed. Suggested details for an agreement are:
- Who can use the vacation home and when
- Who is responsible for paying expenses
- Who manages improvements and has a say on the contents (furniture, decoration)
- Who makes legal decisions
- What insurance coverage should be maintained
- If an interest can be sold and on what terms
- Gifts to a Qualified Personal Residence Trust. A qualified personal residence trust (QPRT) is an irrevocable trust to which you transfer ownership of your vacation home. In a QPRT, you retain the right to use your home for a term of years and then pass your home to your children in equal shares (or in an alternative manner that you could dictate before creating the QPRT). The rules about QPRTs and what property may be contributed to a QPRT are complex, and not all vacation homes would be suitable, but it is an option for consideration.
For more information on Estate Planning Considerations for vacation homes, please contact Attorney Matthew Karr at 617.299.6976 or mkarr@maheritagelawcenter.com.
