Will Your Estate Plan Preserve the Family Vacation Home? by Taralynn Casperson and Susan Repetti

In their article, Taralynn Casperson and Susan Repetti of Nutter, McClennen & Fish, discuss estate planning strategies that will help ensure that one can preserve their summer or second homes for their children, grandchildren, and so on. They present four strategies as follows,

1. Outright Transfers

A complete one-time gift of the property to children and/or grandchildren offers simplicity but may involve a large taxable gift.  To keep the property out of the donor’s estate, the donor must pay fair market rent for any post-gift use of the property. Advantages: straightforward, unencumbered ownership. Disadvantages: eats up federal gift tax exemption, lacks decision-making structure, no donor control, no creditor protection.

  • Variation #1 – Realty Trusts
    In some jurisdictions, realty trusts (or “nominee trusts”) allow owner(s) to hold property in trust and recorded under the trustee’s name with the Registry of Deeds.  Beneficiaries have beneficial ownership, but the trustee(s) hold the legal title.  The trust holds the property until it’s terminated by a unanimous vote of the beneficiaries. Advantages: allows anonymity, clearly defines interests, simplifies transfer process, small percentages may be given over a period of years, possible gift tax valuation discounts. Disadvantages:  inflexible, may only hold real estate, no creditor protection.
  • Variation #2 – Gifts of Fractional Interests Over a Period of Years
    In other jurisdictions, a series of gifts of fractional interests can be used to reduce the gift tax impact and permit continued use by the donors in accordance with their retained fractional interests. Advantages:  smaller gifts, possible gift tax valuation discounts. Disadvantages:  multiple deeds and recording fees, no creditor protection.
  • Variation #3 – Gifts as Tenants in Common
    Each owner has the right to use the entire property, and co-tenants must unanimously agree to major decisions (renovations, leasing, sale, and partition). Advantages:  uniform access and rights to property. Disadvantages: unstructured ownership, lack of governing documents, no creditor protection, cumbersome partition process.

2. Family Limited Liability Company

An LLC comprised of family members provides structure and rules for who may be a member, the specifics of operation and use of the property, and provides protection against creditors, including divorcing spouses.  Some LLCs are managed by members; others have a designated “Manager.” Advantages: facilitates gifts of small percentage interests (including procedure for transfers at lower cost than deeds of real estate), continued existence, governed by state statutes, choice of jurisdiction, possible gift tax valuation discounts. Disadvantages: one-time and annual state filing fees, requires separate income tax return.

3. Gift to Qualified Personal Residence Trust (QPRT)

In a QPRT, a donor transfers a home (primary or secondary) into the new trust.  The trust exists for a defined term – i.e., 5, 10 or 15 years.  The donor continues to pay the carrying costs of the home, including real estate taxes.  At the end of the term, title to the home passes to the remainder beneficiary or beneficiaries.  Although the donor could continue to use the home after the termination of the QPRT term, he or she would need to pay the children fair market rent so that the taxing authorities recognize the completed gift (and wouldn’t seek to assess estate taxes on the home’s value at the donor’s death).  If the donor died during the term, the QPRT would “fail”, and the home would be included in the donor’s taxable estate.  The shorter the term, the less beneficial the tax result.   Longer QPRTs, although more tax advantageous, must be weighed against the possibility that the donor doesn’t survive the trust term. Advantages: maximizes federal gift tax efficiency, creditor protection for remainder beneficiaries, trust structure can include agreement for future use of home. Disadvantages: can be complicated if mortgage is involved, nothing gained if donor dies before stated term of trust.

4. Gift to “Grantor” Trust

A home can be gifted to an irrevocable trust treated as the donor’s “alter ego” for income tax purposes.  The trust structure can provide rules regarding sharing use and expenses among the beneficiaries.  A variant on this technique is a sale to a grantor trust in exchange for an installment note. Advantages:  spouse may be a beneficiary (permitting donor’s use during spouse’s lifetime), creditor protection, donor could buy home back without incurring capital gains tax. Disadvantages: consumes portion of lifetime gift exemption; complicated if mortgage is involved.

Find the entire article here: Will Your Estate Plan Preserve the Family Vacation Home?

Posted by Allison Trupp, Associate Editor, Wealth Strategies Journal

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