Tax Planning

Tax Consequences Employer-Provided Life Insurance

The Tax Consequences of Employer-Provided Life Insurance
The Tax Consequences of Employer-Provided Life Insurance 850 500 smolinlupinco

When considering whether to accept your current position, you probably viewed employer-provided life insurance as a perk. If your benefits package includes group term life insurance with coverage above $50,000, though, you could feel differently come tax time. 

Invisible “income,” higher taxes

The IRS doesn’t include employer-provided life group term life insurance coverage up to $50,000 in your taxable income, and won’t increase your income tax liability. If your policy exceeds $50,000, though, the employer-paid cost is included in the taxable wages reported on your Form W-2.

This is called “phantom income.” You may not see the funds in your bank account, yet they’ll come back to haunt you nonetheless. 


For tax purposes, the cost of group term life insurance is set by a table prepared by the IRS. Even if your employer’s actual cost is lower than what’s listed on the table, your taxable income is determined by the one pre-established in the table. As a result, the amount of phantom income an older employee could be taxed for, is often higher than that which they’d pay for similar coverage under an individual term policy.

As an employee ages and their compensation increases accordingly, this tax trap worsens. 

Is your tax burden higher due to employer-paid life insurance?

If you’re concerned that the cost of employer-provided group term life insurance could be impacting your taxes, look at Box 12 of your W-2 (With code “C”). Does a specific dollar amount appear?

If so, that dollar amount indicates your employer’s cost for group term life insurance coverage you receive in excess of $50,000, less any amount you paid for the coverage. You’ll be liable for local, state, and federal taxes on the figure seen here, as well as any associated Social Security and Medicare taxes. 

Of course, the amount in Box 12 is already included as part of your total “Wages, tips and other compensation” in Box 1 of the W-2. It’s also the Box 1 amount reported on your tax return.

Tax-saving alternatives 

Is the ultimate tax cost disproportionate to the benefits you’re receiving? If so, ask your employer whether they have a “carve-out” plan (a plan that excludes selected employees from group term coverage). If they don’t, ask whether they’d be willing to create one. After all, some of your coworkers may be interested in opting-out, too!

Carve-out plans can be quite flexible. Here are two ways one could work in your favor for tax purposes: 

  • Your employer could continue providing you with $50,000 of group term insurance (which won’t count towards your taxable income). Then, they could provide you with an individual policy for the rest of the coverage.
  • Your employer could provide the funds they’d spend on the excess coverage as a cash bonus, which you could then use to pay the premium for an individual policy. 

If you or your employer have questions about how group term coverage impacts employees’ tax bills, we can help! 

Have questions? Smolin can help

Contact the team at Smolin to learn how you can make the most of employer provided benefits﹘without suffering unnecessary tax penalties. 

Moving mom or dad to nursing home? Tax implications.

Moving mom and dad into a nursing home? Consider the tax implications of this new situation
Moving mom and dad into a nursing home? Consider the tax implications of this new situation 850 500 smolinlupinco

According to reports, nearly 1.5 million Americans are living in nursing homes. This is a big number, even if it represents just half of a percent of our population, so it’s difficult to imagine—until it becomes a reality for your family.  

If you have a parent moving into a nursing home or long-term healthcare facility, there are so many logistics to consider, plus the emotional aspects, and you’re probably not thinking about the tax implications of the situation. 

It’s important to do so, however, so here are five tax-related points for you to ponder as you navigate the transition to a nursing home for your parents.

Five tax implications of nursing homes

1. Long-term medical care costs

Expenses incurred for qualified long-term care, including nursing home care, are counted as deductible medical expenses to the extent that they, along with any other medical costs, exceed 7.5% of adjusted gross income (AGI).

Treatments that are eligible as qualified long-term care services are:

  • Diagnostic
  • Preventative
  • Therapeutic
  • Curing
  • Mitigating
  • Rehabilitative
  • Maintenance or personal care for chronically ill patients

To qualify as chronically ill, a physician or other licensed healthcare practitioner must certify a patient as unable to perform at least two daily living activities for 90 days due to a loss of functional capacity or severe cognitive impairment.

. These activities include:

  • Eating
  • Toileting 
  • Transferring
  • Bathing
  • Dressing
  • Continence

2. Nursing home payments

Payments made to a nursing home are deductible as medical expenses if the person staying at the facility is there primarily for medical care rather than custodial care. If a person isn’t staying in the nursing home primarily for medical care, only the portion of the fee that’s related to actual medical care is eligible for a deduction.

However, if the person is chronically ill, all qualified long-term care services, including maintenance or personal care services, are deductible.

If your parent qualifies as a dependent, you may include any medical costs you incur for your parent along with your own when determining the amount of your medical deduction.

3. Long-term care insurance

The premiums you pay for a qualified long-term care insurance contract can be deducted as medical expenses if they, together with other medical expenses, exceed the percentage-of-AGI threshold. However, they are subject to limitations.

The qualified long-term care insurance contract only covers qualified long-term care services and doesn’t pay costs covered by Medicare, is guaranteed renewable, and doesn’t have a cash surrender value.

You may include qualified long-term care premiums as medical expenses up to specific amounts:

  • For individuals over 60 but not over 70 years old, the 2023 limit on deductible long-term care insurance premiums is $4,770
  • For those over 70, the 2023 limit is $5,960.

4. The sale of your parents’ property

If your parent sells their primary residence, up to $250,000 of the gain from the sale may be tax-free. To qualify for the $250,000 exclusion ($500,000 if married), the seller must have used and owned the home for at least two years out of five years before the sale.

There is an exception to the two-out-of-five-year use test, which is if the seller becomes mentally or physically unable to care for themselves during the five-year period.

5. Head-of-household filing status 

Provided you aren’t married and meet certain dependency tests for your parents, you might be qualified for head-of-household filing status, which comes with a higher standard deduction and lower tax rates than single filing status.

You may be eligible to file as head of household even if the parent you’re claiming as an exemption doesn’t live with you.

Have questions? Smolin can help

These are just a few of the tax issues you might need to deal with if your parents move into a nursing home. If you’re looking for other ways to improve your tax situation and make things easier during this transition, contact the team at Smolin, and we’ll help you navigate the ins and outs of long-term healthcare tax breaks.

Corporate officers, shareholders: Expenses paid personally

Corporate officers or shareholders: How should you treat expenses paid personally?
Corporate officers or shareholders: How should you treat expenses paid personally? 850 500 smolinlupinco

If you play a major role in a closely held corporation, you might occasionally spend personal funds on corporate expenses. Unless you take the necessary steps, these expenses could end up being nondeductible by either an officer or the corporation. This issue is more likely to occur with a financially troubled corporation.

What can’t you deduct?

Generally speaking, you’re not allowed to deduct an expense incurred on behalf of your corporation, even if it’s a legitimate “trade or business” expense, even if the corporation is struggling financially.

This is because taxpayers are only allowed to deduct expenses that are their own. Since your corporation’s legal status as a separate entity must be respected, its costs aren’t yours and can’t be deducted even if you pay them.

To further complicate matters, the corporation typically won’t be able to deduct these expenses because it didn’t pay them on its own. 

It’s important to note that it should be a practice of your corporation’s major shareholders or officers to not cover corporate expenses.

Which expenses may be deductible?

Alternatively, suppose a corporate executive incurs expenses that relate to an essential part of their duties as an executive. In that case, they may be deductible as ordinary or necessary expenses related to the “trade or business” of being an executive.

Suppose you want to create an arrangement that provides payments to you and safeguards their deductibility. In that case, a provision should be included in your employment contract with the corporation explicitly outlining the expenses that are part of your duties and authorizing you to incur them.

An excellent example of this kind of agreement would be out-of-town business conferences on the corporation’s behalf, where you would spend personal funds to do your work.

What’s the best alternative?

To avoid the complete loss of any deductions by the corporation or yourself, you should create an arrangement in which the corporation reimburses you for any relevant expenses you incur.

Provide receipts to the corporation and use an expense reimbursement claim form or system so that your corporation can deduct the amount of money they’ve reimbursed you.

Have questions? Smolin can help

If you want to know more about how to set up reimbursement arrangements at your corporation, or you have questions about deductible business costs, contact our professional team at Smolin, and we’ll walk you through the process.

Catch a tax break for making energy-efficient home improvements this summer
Catch a tax break for making energy-efficient home improvements this summer 850 500 smolinlupinco

According to the National Weather Service, nearly 190 million Americans have been under a heat advisory this summer. These scorching months might have you thinking about ways to make your home more energy efficient so that you don’t pay utility prices that are just as high as the heat index.

If you do decide to make some upgrades, there’s a new tax break that could ease some of the financial burden of the process. The Inflation Reduction Act of 2022 is an enhanced residential energy tax credit that can be used to mitigate the costs of qualifying improvements.

Who’s eligible for the tax credit

By making eligible energy-efficient improvements to your home on or after January 1, 2023, you might qualify for a tax credit of up to $3,000, and you can claim this credit for any eligible improvements through 2032.

This tax credit equals 30% of specific qualified expenses for energy improvements to a home located in the United States, including:

  • Qualified energy-efficient improvements installed during the year
  • Residential “energy property” expenses
  • Home energy audits

Of course, there are limits on the allowable yearly credit and the amount of credit for specific expenses.

The maximum claimable credit available each year is:

  • $1,200 for energy property costs and specific energy-efficient home improvements, with limits on doors ($250 per door and $500 total), windows ($600 total), and home energy audits ($150)
  • $2,000 per year for qualified heat pumps, biomass stoves or biomass boilers

In addition to the credit for windows and doors, other energy property includes central air conditioners and hot water heaters.

Prior to the 2022 law, there was a lifetime credit limit of $500. Today, this credit has no lifetime dollar limit. You’re allowed to claim the maximum annual amount every year that you make qualifying improvements until 2033.

For instance, you can make a few improvements this year and take a $1,200 credit for 2023, and then make additional improvements the next year to claim a $1,200 credit for 2024.

It’s important to note that the credit is claimed in the year in which the installation is completed.

Additional limits and rules

Generally speaking, the credit is available for your primary residence, although some improvements on secondary residences may qualify. 

If a property is used exclusively for business, you’re not allowed to claim this credit. 

If your home is partially used for business, the amount of credit you can receive will vary. For business use maxing out at 20%, you can claim the full credit, but anything over 20% will get you a partial credit.

While the credit is available for specific water heating equipment, you can’t claim it for anything that’s used to heat a swimming pool or hot tub.

This credit is nonrefundable, which means you can’t get back more on the credit than you owe in taxes. Additionally, you can’t apply any excess credit to future tax years. However, there’s no phaseout based on your income level, so even high-income taxpayers can benefit from this credit.

Have questions? Smolin can help

If you have questions about making energy-efficient improvements or purchasing energy-saving property for your home, contact the knowledgeable professionals at Smolin. We’ll show you how to make the Inflation Reduction Act and other tax breaks work for you.

What to Do When You’ve Been Asked to Serve as an Executor
What to Do When You’ve Been Asked to Serve as an Executor 1275 750 smolinlupinco

If a family member or friend has asked you to serve as executor of their estate, it’s critical that you understand the responsibilities and potential risks before you sign on. Note that you are not required to accept this appointment, but once you do, it can be difficult to extricate yourself if you change your mind.

With that in mind, it’s important to ask yourself the right questions before you accept the role.

Questions to ask before you become an executor

What’s your relationship to the person requesting you become their executor? 

If they’re a close family member, you may want to consider not accepting the appointment if you think your grief after their passing will make it difficult to effectively follow their instructions in your role as executor.

Are the duties of executor something you are willing and able to take on? 

Usually, an executor is responsible for: 

  • Handling probate
  • Identifying and taking custody of the deceased’s assets
  • Making investment decisions 
  • Filing tax returns 
  • Dealing with creditors’ claims
  • Paying the estate’s expenses
  • Distributing assets according to the will

While you can seek help from professionals such as attorneys, accountants, and investment managers, it’s still a labor-intensive process that may provide little or no compensation. 

Inquire about whether there’s an executor’s fee and whether the estate has set aside funds to pay for the services of professional advisors.

Does it make sense based on where you are located? 

If you’re living far away from the place where the beneficiaries and assets are located, your role as executor will be more difficult, expensive, and time-consuming.

What is your relationship with the beneficiaries like?

If your relationship with the beneficiaries is in any way troubled, accepting the appointment could put you in a difficult position, especially if you’re also a beneficiary and the other beneficiaries view your appointment as a conflict of interest.

Will your expenses be paid by the estate? 

Even if you receive no fee or commission for serving as executor, you need to ensure that the estate will pay or reimburse you for any out-of-pocket costs you incur while fulfilling the deceased’s wishes.

A final consideration is that some individuals appoint co-executors. For instance, they may choose one person who knows the family and understands its dynamics and an independent executor with the required expertise. 

It’s important to know if you’ll serve as executor solo or with a partner. Depending on the circumstances, having a co-executor may be a relief, or it may add more complications.

Let Smolin be your guide

If you’re unsure whether you want to agree to become an executor for a friend or family member, or you have questions about how this role could impact your life, contact Smolin, and we’ll help you determine whether this role is the right one for you.

Prepare for an Uncertain Federal Gift and Estate Tax Exemption Amount with a SLAT
Prepare for an Uncertain Federal Gift and Estate Tax Exemption Amount with a SLAT 1275 750 smolinlupinco

For 2023, the federal gift and estate tax exemption amount is set at $12.92 million (or $25.84 million for married couples). However, in the absence of action from Congress, on January 1, 2026, it’s scheduled to decrease to a mere $5 million ($10 million for married couples). 

According to current estimates, those numbers are expected to be adjusted for inflation to just over $6 million and $12 million, respectively.

If you anticipate the value of your estate will surpass estimated 2026 exemption thresholds, consider implementing planning techniques today that may assist in reducing or avoiding gift and estate tax liability in the future. 

One such planning technique is a spousal lifetime access trust (SLAT). In appropriate circumstances, a SLAT enables you to remove substantive wealth from your estate without incurring tax while also providing a safeguard if your circumstances change in the future.

SLAT fundamentals 

A SLAT is an irrevocable trust that permits the trustee to distribute funds to your spouse if a need arises during their lifetime. Usually, SLATs are designed to benefit your children or other beneficiaries while providing income to your spouse throughout their lifetime.

You can make completed gifts to the trust, thereby removing those assets from your estate. However, you can still maintain indirect access to the trust through your spouse if they are named a beneficiary of the trust. 

This is commonly achieved by appointing an independent trustee with complete discretion to distribute funds to your spouse.

Beware of potential complications

SLATs must be meticulously planned and drafted to avoid undesired consequences. For instance, to prevent the inclusion of trust assets in your spouse’s estate, your gifts to the trust must be made with your separate property. 

This may necessitate additional planning, particularly if you reside in a community property state. Additionally, after the trust is funded, it’s crucial to ensure that the trust assets aren’t commingled with community property or marital assets.

It’s essential to remember that the benefits of a SLAT rely on indirect access to the trust through your spouse, which means your marriage must be strong for this strategy to be successful.

There’s also a risk of losing the safety net a SLAT provides if your spouse passes away before you do. One way to mitigate this risk is to establish two SLATs: one created by you with your spouse as a beneficiary and one created by your spouse naming you as a beneficiary.

If both you and your spouse establish a SLAT, careful planning is required to avoid the reciprocal trust doctrine. Under this doctrine, if the IRS determines that the two trusts are interconnected and place you and your spouse in a similar economic position as if you had each created a trust for your individual benefit, it may invalidate the arrangement. To avoid this outcome, the terms of the trusts should be sufficiently varied.

Have questions? Smolin can help.

If you’re having issues wrapping your head around making a SLAT work for you or your spouse, contact the knowledgeable professionals at Smolin, and we’ll help you navigate this complex process.

Ease the Burden of Being a Member of the Sandwich Generation with these Action Steps
Ease the Burden of Being a Member of the Sandwich Generation with these Action Steps 1275 750 smolinlupinco

Are you raising children and supporting aging parents at the same time? If so, you can count yourself among those in the “Sandwich Generation,” a cohort “squeezed” by the demands of caring for children and older adults. 

While providing for your parents later in life may be gratifying, it can also be time-consuming. Deciding how best to handle the financial affairs of your parents as they age requires much thought.

You’ll need to incorporate their needs into your own estate plan. If necessary, you’ll also have to tweak some arrangements they’ve already made. Here are some essential steps you can take to manage your situation.

Identify key contacts

Just as you would do for yourself, you’ll need to collect the names and addresses of the professionals important to your parent’s medical and financial matters. Your list could include the following:

  • Stockbrokers 
  • Financial advisors
  • Attorneys
  • CPAs
  • Insurance agents
  • Physicians

List and value assets 

If you’re managing your parents’ financial matters, you’ll need an in-depth understanding of their assets. Maintain a list of their investment holdings, IRAs, other retirement accounts, and life insurance policies. Include current balances, account numbers, and projections for social security benefits.

Execute the proper estate planning documents. 

Make a plan to gather and review several legal documents involved in estate planning. If your parents already have some of this paperwork completed, be aware that it may need updating. 

Common elements in an estate plan include the following.

Wills. Your parents’ wills control where their possessions go and tie up other loose ends. (Jointly owned property with rights of survivorship automatically passes to the survivor.) It’s important to note that wills usually name an executor, and if you’re handling your parents’ financial matters, you may be the best choice.

Living trusts. A living trust can add to a will by providing for the distribution of selected assets. Unlike some of the assets in a will, a living trust isn’t required to go through probate, so you might be able to save time and money and avoid public disclosure.

Powers of attorney for health and finances. This authorizes someone to legally act on behalf of another person. A durable power of attorney is the most common version, and with this, the authorization continues after the individual becomes disabled. This document gives you the ability to better manage your parents’ affairs.

Living wills or advance medical directives. These documents provide guidance for end-of-life decisions. It’s essential to make sure that your parents’ doctors and other relevant medical professionals have copies of advance directives so they can act in accordance with your parents’ wishes.

Beneficiary designations. If your parents have completed beneficiary designations for their retirement plans, IRAs, and life insurance policies, these designations will take precedence over any references in a will, so it’s critical to keep them current.

Spread the wealth

If you decide that the best way to help your parents is to provide them with monetary gifts, avoiding a gift tax liability is relatively easy. Under the annual gift tax exclusion, you can give any recipient up to $17,000 (for 2023) without being required to pay gift tax. 

Also, payments made to medical providers are not considered gifts, so you may make these payments on your parents’ behalf without using any of your yearly exclusion or lifetime exemption amounts.

Have questions? Smolin can help

If you’re a member of the Sandwich Generation, you’ve probably got plenty on your plate. If you have questions about handling your parent’s estate plans or managing your own, contact the knowledgeable professionals at Smolin, and we’ll help you navigate this complex process with ease.

Is QuickBooks Right for your Nonprofit?
Is QuickBooks Right for your Nonprofit? 1275 750 smolinlupinco

Nonprofit organizations are created to serve nonfinancial or philanthropic goals rather than to make money or build value for investors. But they still need to keep track of their financial health, paying attention to factors like:

  • How much funding is coming in from donations and grants
  • How much the organization is spending on payroll
  • How much it’s spending on rent and other operating expenses

Many nonprofits use QuickBooks® for reporting their results to stakeholders and handling their finances more efficiently. Here’s an overview of QuickBooks’ specialized features for nonprofits.

Features of QuickBooks for nonprofits

Terminology and functionality. QuickBooks for nonprofits incorporates language used in the nonprofit sector to make it more user-friendly for nonprofits.

For example, the software comes with templates for donor and grant-related reporting. Accounting team members can also use it to assign revenue and expenses to specific funds or programs.

Expense allocation and compliance reporting. Many nonprofits often receive donations and grants with particular requirements regarding the expenses that can be applied. 

These organizations can use QuickBooks to establish approved expense types and track budgets for specific funding sources. They can also use the software to satisfy compliance-related accounting and reporting regulations.

Streamlined donation processing. Everyone likes convenience, and donors to nonprofits are no exception. The easier it is to donate to a nonprofit, the more likely it is that people will do so. 

QuickBooks allows for electronic payments from donors. The software also integrates with charitable giving and online fundraising sites, enabling nonprofits to process in-kind contributions, such as office furniture and supplies.

Tax compliance and reporting. Failure to comply with IRS reporting regulations could cause an organization to lose its tax-exempt status. QuickBooks provides a customized IRS reporting solution for nonprofits, which includes the ability to create Form 990, “Return of Organization Exempt from Income Tax.”

Donor management. With QuickBooks, nonprofits can store donor lists. This function includes the ability to divide the data according to location, contribution, and status.

Using these filters can make connecting with and nurturing donors who meet specific criteria easier. One example is reconnecting with significant donors who’ve stopped making regular contributions to your organization.

Data security. Data security is critical to building trust and encouraging donors to support your organization again in the future. 

QuickBooks protects donors’ personal identification and payment information by allowing the account administrator to limit access for viewing, editing, or deleting donor-related data. 

With QuickBooks, team members can only access and share data with the administrator or owner’s permission.

Not just for for-profit businesses

QuickBooks may be known as an accounting solution for small and medium-sized companies, but it also provides solutions for the nonprofit sector. 

From streamlined processes and third-party integrations to security management and robust reporting, Quickbooks can help nonprofits improve their financial management and fulfill the mission of their organization.

Have questions? Smolin can help

If you’re unsure of whether QuickBooks is right for your organization or you require other accounting services, contact the knowledgeable team at Smolin, and we’ll help you choose the best option for your nonprofit.

What are the Advantages and Disadvantages of Claiming Big First-Year Real Estate Depreciation Deductions?
What are the Advantages and Disadvantages of Claiming Big First-Year Real Estate Depreciation Deductions? 850 500 smolinlupinco

Certain businesses may be allowed to claim large first-year depreciation tax deductions for eligible real estate costs instead of depreciating them over several years. Is this the right choice for your business? You may assume so, but the answer is not as simple as it seems.

Qualified improvement property

For eligible assets placed into service during tax years beginning in 2023, the maximum allowable first-year Section 179 depreciation deduction is $1.16 million. 

It’s important to note that the Sec. 179 deduction can be claimed for real estate qualified improvement property (QIP) up to the maximum yearly allowance.

QIP includes any improvement to an interior area of a nonresidential building that you placed in service after the building was first placed in service. 

For Sec. 179 deduction purposes, QIP also includes:

  • HVAC systems
  • Nonresidential building roofs
  • Fire protection and alarm systems
  • Security systems placed in service after the building was first placed in service

With that said, expenditures that are attributable to the enlargement of the building, such as elevators or escalators or the building’s internal structural frame do not count as QIP, and you must depreciate them over multiple years.

Mind the limitations

A taxpayer’s Sec. 179 deduction isn’t able to cause an overall business tax loss, and the maximum deduction is phased out if too much qualifying property goes into service within the tax year. 

The Sec. 179 deduction limitation rules can be complicated if you own a stake in a pass-through business entity (a partnership, an LLC treated as a partnership for tax purposes, or an S-corp). 

Last but not least, trusts and estates can’t claim Sec. 179 deductions, and noncorporate lessors face added restrictions.

First-year bonus depreciation for QIP

Aside from the Sec. 179 deduction, an 80% first-year bonus depreciation is also available for QIP that’s put into service in the calendar year 2023. If your aim is to maximize first-year write-offs, you’d want to claim the Sec. 179 deduction first. If you max out with 179, then you’d claim your 80% first-year bonus depreciation.

It’s essential to note that for first-year bonus depreciation purposes, QIP doesn’t include:

  • Nonresidential building roofs
  • HVAC systems
  • Fire protection and alarm systems
  • Security systems.

Consider depreciating QIP over time

There are two reasons why you should think carefully about claiming big first-year depreciation deductions for QIP.

1. Lower-taxed gain when the property is sold

First-year Sec. 179 deductions and bonus depreciation claimed for QIP can create what’s called depreciation recapture, which means your assets will be taxed at higher ordinary income rates when the QIP is sold. 

Under the current regulations, the maximum individual rate on ordinary income is 37%, but you may also end up owing the 3.8% net investment income tax (NIIT).

Conversely, for any QIP that’s held for more than one year, gain attributable to straight-line depreciation is taxed at an individual federal rate of only 25%, plus the 3.8% NIIT if eligible.

2. Write-offs may be worth more in the future

If you claim large first-year depreciation deductions for QIP, your depreciation deductions for future years will be reduced accordingly. If federal income tax rates go up in the future, you’ll have essentially traded potentially more valuable future-year depreciation write-offs for less-valuable first-year write-offs.

Have questions? Smolin can help

The decision to claim first-year depreciation deductions for QIP or not claim them can be complicated. If you have questions about this process or need help navigating and other tax issues, contact the team at Smolin, and we’ll make sure you have the answers you need to make the best choice for your business.

Handle with Care: Including a Family Vacation Home in your Estate Plan
Handle with Care: Including a Family Vacation Home in your Estate Plan 1275 750 smolinlupinco

The fate of a family home can be an emotionally charged estate planning issue for many people, and emotions often run high when dealing with assets like vacation homes that can have a special place in one’s heart.

With that in mind, it’s essential to address your estate planning carefully when deciding what to do with your vacation home.

Keeping the peace

Before determining how to treat your vacation home in your estate plan, discuss it with your loved ones. If you simply divide ownership of the house equally among your relatives, it may cause unnecessary conflict and hurt feelings. 

Some family members may have a greater interest in keeping the family home than in any financial gain it might provide, and others may prefer to sell the property and use the proceeds for other things.

One viable solution is to leave the property to loved ones who wish to keep it and leave other assets to those who don’t. 

Alternatively, you can create a buyout plan that establishes the conditions under which family members who want to keep the property can purchase the interests of those who wish to sell.

Your plan should establish a reasonable price and payment terms, which can include payments in installments over several years.

Consider creating a usage schedule for nonowners who want to be allowed to continue using the vacation home. To help ease the costs of keeping the property in the family, consider setting aside some assets that will generate income to cover the costs of maintenance, property taxes, repairs, and other expenses that might arise.

Transferring your home

Once you’ve decided who will receive your vacation home, there are a variety of traditional estate planning tools you can use to transfer it tax-efficiently. It might make sense to transfer the interests in the property to your beneficiaries now, using tax-free gifts.

However, if you’re not ready to relinquish ownership just yet, consider using a qualified personal residence trust (QPRT). With a QPRT, you can transfer a qualifying vacation home to an irrevocable trust, which allows you to retain the right to occupy the property during the trust term.

When the term of the QPRT ends, the property will be transferred to your family, though it’s possible to continue occupying the home while paying them fair market rent. The transfer of the home is a taxable gift of your beneficiaries’ remainder interest, which is only one small part of the home’s current fair market value.

You’re required to survive the trust term, and the property must qualify as a “personal residence,” which means that, among other things, you must use it for the greater of 14 days per year or more than 10% of the total number of days you rent it out.

Discussing your intentions

These are just a few issues that can come with passing a vacation home down to your loved ones. Estate planning for this process may be complicated, but it doesn’t have to be. The key is to discuss all the options with your family so that you can create a plan that meets everyone’s needs.

Have questions? Smolin can help

Are you unsure of the best way to pass down your vacation home to your children or other relatives? Consult with the knowledgeable professionals at Smolin, and we’ll help you find the solution that meets your needs.

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