What’s the Best Way to Pass the Family Vacation Home to the Next Generation?

The generous exclusion that allows wealthy individuals to gift up to $11.4 million and not get hit with federal estate taxes, came from the Tax Cut and Jobs Act of 2017. However, it’s not expected to last forever, according to the article “What to Know When Gifting the Family Vacation Home” from Barron’s Penta. Those in Northeast Florida who can, may want to take advantage of this estate planning window to be extra-magnanimous before the exemption sunsets to about $5 million (adjusted for inflation) in 2025.

At issue for potentially giving, is that when someone transfers property, the recipients must account for it, according to the original price paid for the property. This is known as the basis. For example, shares of stock valued at $5 million today that were originally purchased for $1 million 10 years ago, would be subject to income taxes only on $4 million, if the recipient were to sell the stock.

Advice given to wealthy individuals is to make use of that higher estate tax exclusion while it’s still in place, and that may include property that they expect to gift to beneficiaries. The most likely asset would be the family vacation home, whether it’s a ski chalet or a beach house.

First, make sure your children want the property. There’s no sense going through all the processes, unless they plan on enjoying the vacation home. Next, figure out the best way to gift the home, while making the most of the high exclusion.

A nice point: you won’t have to give up the use or control of the house during this process. Experts advise not making an outright gift. This can lead to less control or the loss of a share to a child’s spouse, in the event of a marital split.

Another option: transfer the property into a trust. There are several kinds that would work for this purpose. Another is to consider a Limited Liability Corporation, which also serves to protect the family’s assets against any claims, if someone were to be injured on the property. The parents would transfer the property into the LLC and give children interests in the company.

A fairly common structure for vacation home ownership is called a Qualified Personal Residence Trust (QPRT). These are used by families who want to retain the right to continue using the home, usually for the rest of their lives. The property is transferred to the designated beneficiaries at death. If it is set up properly, a QPRT avoids any income or estate taxes.

A trust also lets an individual or a couple be very specific in how the property will be used, who can use it and any rules about how they want the home maintained. Making sure that a beloved family vacation home is well-cared for and not rented out for college parties, for instance, can provide a lot of comfort for a couple who have poured their hearts into creating a lovely vacation home.

If you would like to speak with our experienced estate planning team to learn how you can take advantage of the current federal estate tax exemption to pass your family’s vacation home on to the next generation, call Team Legacy.

Reference: Barron’s Penta (March 31, 2019) “What to Know When Gifting the Family Vacation Home”