You might think it’s easy to leave a vacation home to your children in your will. But there are many issues that can arise. For instance, over time children might squabble over who will pay for major repairs or renovations, especially if some children use the property more than others. Children might disagree about whether to sell the property. And there are tax, liability and asset protection issues and opportunities as well.
If you haven’t thought a great deal about how a vacation home fits into your estate plan, we can help you come up with a plan that best fits your family’s needs, both now and down the road.
What type of ownership?
There are many ways to handle a transfer of a vacation home:
1) you can sell the home to your children before you die, if you reach a point where you no longer want the responsibility of ownership. However, this could result in hefty capital gains taxes.
2) You can leave the home in equal shares to your children in your will. But this can lead to arguments between the children over handling major expenses that come up in connection with the property, particularly if some children are financially better off than others.
3) You can leave the home to a trust. This can be a good idea because you can create rules for the children’s use of the property, contributions to maintenance and expenses, etc. Also, a trust can help shield the property from creditors if one child runs into financial difficulties.
4) You can put the home into a limited-liability company or a limited-liability partnership. This requires a more formal corporate-type structure than a trust, but in some cases this can be a good thing. Also, an LLC or LLP can limit the children’s liability. For instance, if a child brings a friend to the property and the friend slips and falls and has a serious injury the child’s liability might be limited to the value of the property.
5) You can put the home into a “Qualified Personal Residence Trust”, or QPRT. Basically you give the home to your children, but retain the right to use it for a set term. This can help reduce your gift tax, because although you are making a gift of the home to your children during your lifetime, the value of the gift isn’t the full value of the home-it’s the value of the home minus the value of your right to live there for whatever the term is. The only problem with a QPRT is figuring out what the term should be.