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.