Estate Planning with Vacation Homes
One of the most important assets to families in estate planning may often be the family vacation home. There are numerous ways to transfer ownership to successive generations, each with benefits and drawbacks. Here is a brief synopsis of a few more common methods.
Outright transfers
The easiest way for a person to pass title to successive generations would be to simply transfer a portion of the property to their children, either as tenants in common or with a right of survivorship. Obviously, this is the cheapest and quickest way to accomplish a transfer. By transferring a fractional interest in the property, the IRS even allows discounts beyond simply the cost of partition.
The drawbacks here may be prohibitive. For starters, an interest owned outright by any person may be subject to his or her creditors or spouse in a divorce. Additionally, family squabbles over either the use of the property or the financial contributions for upkeep can lead to friction. Also, all owners may have to consent to the sale of the property. Finally, and perhaps most importantly, the tax ramifications can be enormous, including gift, estate and income taxes.
Transfers in trust
The most common trust transfer would be to a revocable trust. The cost of the revocable trust notwithstanding, this option is on par with an outright transfer. This also allows the grantor to retain control as the trustee for the payment of expenses, use of the property and sale/disposal thereof. However, from a tax perspective, the transfer provides no benefits, as the property remains in the taxable estate of grantor. Additionally, fiduciary duties may force the sale of the property in the event the grantor is disabled and needs funds to support himself or herself. Finally, as a self-settled, revocable trust, very little creditor protection is offered.
An option offering more creditor protection would be a Qualified Personal Residence Trust or QPRT. Here, the grantor transfers the interest to the QPRT while retaining the right to use the property for a period of time. As a grantor trust, the expenses of the property remain deductible to the grantor during the term, and in some cases, even after the term. Fractional interest discounts may even be available on the transfers to the trust. There are two partial drawbacks to a QPRT. First, if the grantor dies during the retained interest term, the entire value of the property is included in the grantor’s taxable estate. Second, if the grantor survives that term, he or she will have to rent the property from the remainder beneficiary.
Transfers to an Entity
Entity planning provides some flexibility for transfers, but has associated risks. The grantor can transfer the entire property and then gift interests in the entity to various persons as the grantor sees fit while utilizing fractional interest discounts. Every level of care the property requires, from daily cleaning to major repairs, can be delegated to the appropriate persons. Additionally, funding can be controlled in the entity’s central account. Creditor protection exists to varying degrees depending on the type of entity and the jurisdiction of creation. Also, transfers to outsiders can be controlled through the use of written agreements. Furthermore, as an estate planning tool, an interest in an entity is treated as intangible property, meaning out of state property may avoid ancillary administration upon the death of the original owner.
The restrictions on the formation and operation of entities in this manner may prove onerous. A valid business purpose must exist for the transfer or the IRS can challenge it. Additionally, there are some restrictions on personal uses.
Conclusion
The family home is an important asset that should be preserved and protected for future generations. Special consideration should be given to not only how to plan for an orderly succession to the next and future generations, but also how to protect and preserve the home from outside variables such as creditors and internal family squabbles.
If you have a question about estate planning with vacation homes, or would like further information please call or email Hoffman & Associates today.
404.255.7400
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