The family vacation home holds memories and estate planning challenges.
Summertime is coming.
Perhaps your travel plans have been adjusted in response to COVID-19.
You will be unable to visit Europe or Disney World.
You can still travel to your family vacation home.
The memories you make there can be passed down, perhaps through the generations.
According to a recent The Spokesman Review article titled “Exit strategy for keeping the cabin in the family,” passing the vacation home down through generations will take careful estate planning.
The first thing you need to consider is how you plan to transfer the property to your children.
Two options to consider: sell the property outright to your children or to place the vacation home in a qualified personal residence trust.
What are the pros and cons of each?
Selling the property to your children while you are alive allows you to help ensure that it remains in the family.
You can rent it from the children when you want to use it.
This allows you to enjoy the property without the responsibilities associated with owning the property and also provide a means of rental income to your children.
One issue with selling the property is capital gains tax.
The value of your vacation home has likely increased, especially if you have owned the property for a long time.
If you made capital improvements, the capital gains taxes could be offset.
What are capital improvements?
These include work done on the vacation home to extend its life or increase the value of the property.
Typically these are function and structural in nature such as a remodeled kitchen, finished basement, replaced roof, or new deck.
Simply purchasing furniture or curtains does not count as a capital improvement.
The capital gain is calculated between the adjusted sales price and the adjusted basis.
The adjusted sales price is the selling price with the selling expenses excluded.
The adjusted basis is the original cost of the vacation home plus the cost of capital improvements.
If the cost of capital improvements is high, then these can greatly reduce the capital gains.
Determining what qualifies as a capital improvement verses a maintenance expenses is not always simple.
Working with an experienced estate planning attorney or tax professional can help you make the distinction.
The second previously mentioned transfer method is the qualified personal residence trust (QPRT).
The vacation home is treated as a second residence.
The property is placed in the trust for a specific amount of time, typically ten or fifteen years.
You can continue to enjoy the vacation home during this time frame.
If you outlive the time set for the trust, the property passes to your children.
This reduces the value of your estate.
If you die before the end of the specified time, your vacation homes returns to your taxable estate if you have not set up a trust to hold the property when you die.
These trusts are beneficial for families who need to reduce their taxable estates.
The timing is tricky because you cannot predict when you will die.
Longer terms allow for an increase in estate tax savings.
Benefits are minimized if you die to early.
In addition to determining how the transfer the vacation home, you need to know if the children are financially able to maintain the property.
Although they can rent the property, new issues arise with this solution.
Are these the only two option available?
You may be able to utilize another solution to meet the needs of your family.
Work with an experienced estate planning attorney to help you transfer your family vacation home.
Reference: The Spokesman Review (April 19, 2020) “Exit strategy for keeping the cabin in the family”