3 Ways to Leave Your Vacation Home to Your Family
Thinking about how you will pass your beach house or mountain cabin along to future generations? “You will want to consider several factors, such as how many family members might end up with shares in it, their financial situations as well as your own, how long you wish to maintain ownership, and what the potential impact on your taxes might be,” says Jeralyn Seiling, a director of Merrill Lynch’s Wealth Structuring Group. Transferring the property may also result in federal estate, gift, or generation-skipping taxes. Here are three possibilities to consider.
An Outright Gift is often the easiest and most straightforward way to go, this option also requires the least paperwork. Giving it away during your lifetime could result in federal gift taxes, depending on the property’s value and how much of your individual federal gift and estate tax exemption is available. In many states such a gift is likely to avoid state gift tax consequences. Keep in mind that if you give interests in the home to more than one person, any owner can force a sale of the home, so make sure everyone is on board with your plan. Furthermore, if you choose to continue to reside in or use the property once the gift is complete, you will need to pay fair market rent to the family members who own it following the transfer.
A Qualified Personal Residence Trust is a special legal entity that can help you structure your financial holdings, and often save on federal estate and gift taxes. In this case, you would transfer the house’s title to a qualified personal residence trust (QPRT) while retaining the right to use the home for a specified length of time. That transfer is subject to federal gift taxes, but the home’s value for transfer tax purposes is discounted based on the term of years you retain use of the house, your age, and the applicable IRS interest rates at the time the trust is created —thus reducing taxes—because ownership does not go immediately to the beneficiaries. While you continue to use the house, you are responsible for all expenses, including real estate taxes and repairs. Once the specified period ends, the house goes to those you name as the designated beneficiaries of the QPRT, who should owe no federal gift or estate taxes. As with the outright gift, if you desire to remain in or use the residence following the expiration of the term of years, you must pay fair market rent to the remainder beneficiaries for such time.
A Family Limited Liability Company
With this option, you pass ownership of the home to another kind of special legal entity—a limited liability company (LLC). As manager of the LLC, you can transfer shares to individual family members. A detailed operating agreement specifying who has access to the home and when, as well as who is responsible for taxes, upkeep, and other expenses. Keep in mind, however, that according to the rules for such entities, any family member who uses the residence may need to pay rent to the LLC, complicating this approach. An LLC can offer tax advantages and help you maintain control over the property even after you give shares to your children.
Finally, make sure to consult with your tax advisors anytime you transfer a home. There are many legal, tax, and financial issues to consider.
For more information, contact The Menashe Morley Group in the Rancho Santa Fe office at 858-381-8113. The Menashe Morley Group, serving the community for over 30 years: David Menashe is a Senior Vice President and Wealth Management Advisor, Bruce Morley is a First Vice President and Wealth Management Advisor and John Naviaux is a Vice President and Wealth Management Advisor for Merrill Lynch, Pierce, Fenner & Smith Incorporated.