One other issue to consider is the use of conservation easements, particularly if there is a significant amount of land involved. If you would like the property to remain “as is”, you could donate the development rights to a qualified charity that would preserve the natural habitat or open space. This would qualify you for an income tax deduction and would also decrease the value of the property for transfer tax purposes.
A QPRT enables you to pass on your home or your vacation home to your children while retaining the right to live in it for a specified period of time. For tax purposes, the value of the property is reduced by the right you retain to live in it during the specified term. The reduction in value to your estate for tax purposes, combined with the appreciation of the property over the specified term, provides a significant gift tax advantage.
If it is important to you to hold onto a family home for future generations, beyond just your children, a dynasty trust may be the best vehicle for you to use to pass it on. The trust documents included in a dynasty trust are quite detailed in terms of how the home is used and cared for. Investment provisions are also included in the trust document to permit the trustee to have most of the trust wealth comprised of a single asset (the vacation home), to not be required to diversify the investment, and permission to hold non-income producing assets.
By employing a GP or an LLC to own the property, you can avoid challenges of local transfer taxes or ownership by minor children. This strategy allows you to divide up the ownership interests of the assets and assign a controlling interest to specific heirs to manage the decision making for the property.
In addition to structuring the gift, 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 governing the use and operation of the property. If you and other family members have already inherited a vacation home without having an agreement in place, you may want to try to work together to create your own agreement – before you really need one. You and your co-heirs could form a GP or LLC and create an agreement to govern usage, funding costs of repairs, etc. Details of an agreement may include the following:
Also called “living trusts”, a revocable trust is a trust you can change, modify, or revoke at any time. You can transfer your vacation property into a revocable trust to remove it from your taxable estate and avoid the probate process, simplifying the transfer to your heirs.
If your vacation home has a relatively small property value, or if your family is large, you may want to gift shares of the property to heirs using the annual $13,000 gift tax exclusion. This can be accomplished by simply preparing a deed that reflects the ownership percentages after each gift.
As the holidays approach and travel plans take shape, you may be fortunate enough to be looking forward to a journey to a vacation home. Whether at a ski resort, a tropical beach, or a wooded lakeside cabin, many families gather at their vacation homes collectively, with multiple generations sharing the space at once, or take turns using it with their smaller nuclear families or groups of friends. If you own a vacation home, you should consider whether and how you want to keep it in the family. Your estate plan should consider gift and estate tax issues, how to fund carrying costs, and family issues with regards to how to equitably share access to the home.
Following are some ways to structure gifts or bequests of vacation homes to keep them in the family and minimize the tax impact.
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The information on this website may address some questions, but is not intended to be a comprehensive analysis of the topic or legal advice.
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