By Dana Ragiel
For those of us who are fortunate enough to have a vacation home or one we can use owned by our parents or grandparents, there is the second side of the proverbial sword. If it is an heirloom house, one that has been handed down through several generations, there are probably elevated tangible costs such as maintenance and repairs, in addition to property taxes, insurance and/or association fees.
Intangible costs include family angst and squabbles over “booking the calendar” to use the home and deciding who will manage the property with the associated financial aspects. If the beach cottage, lake house or mountain lodge has been in the family for more than one generation, there may also be children, cousins and grandkids in the mix of stakeholders who have differing opinions on whether to keep or sell the property. There are steps you can take as part of the planning process to reduce the chance for sibling rivalry and stress after you are gone.
Ask yourself, who will likely be using the property? Are your adult children spread throughout the country? Do all your children have the means to travel as well as cover their share maintenance costs, property taxes and insurance associated with the family home? How do you manage the calendar, especially holidays and school breaks? Some families hire a property manager who has experience handling rental properties, but there is a significant cost for this service.
If there is sufficient value to justify the legal costs, a legacy trust can be used to hold the heirloom property. This is one of the solutions we can discuss with you as part of our Waypoint FORMula process here at Integra Capital Advisors. Our discussions include the various options available to you, as well as how your assets and wishes would be protected. We work closely with your family attorney or can refer a trust and estate attorney that we collaborate with.
A specific trust known as a Qualified Personal Residence Trust (QPRT) is an irrevocable trust that allows its creator to remove a personal home from the estate. The purpose is to reduce the amount of gift tax that is incurred when transferring assets to a beneficiary, your heirs in this example.
How does a QPRT work? You choose a term of ownership of the house. Let’s say you’re 65 and decide to set up a ten year trust. At the end of the ten years, the trust dissolves and the house is distributed to the beneficiaries you have designated at the end of the term. Once you place the house in the QPRT, you cannot take the heirloom house back as it is considered a gift that you have retained an interest in for the ten year period. To prove that it is a gift for IRS purposes, you need to pay a market value rent to the beneficiary and have gifted it to the beneficiary (your adult children in this example) who take ownership at the end of the ten year term. You can continue to live in the house at the end of term by paying rent but only if the new owners, your children, choose to rent it you. This can become as issue if your adult children predecease you and your son/daughter in-law inherit the house.
In summary, there are planning techniques you can use to facilitate keeping your heirloom home or vacation house in the family. Good communication with your heirs is paramount to developing a good plan, which will include assets to provide for the care and costs of your heirs continuing to enjoy the home with as little squabbling as possible. Call us today to start a conversation on solutions for your family.
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