How to Include Your Family’s Vacation Home in Your Estate Plans
Vacation homes can be wonderful assets. You can use them as a home away from home during vacations and rent them out when you aren't using them. Things can get a little more complicated when it comes to including the vacation home in estate plans. Here are some options you should consider for doing so.
Establish an LLC
Many people use a vacation home as a source of income. If you or those you intend to inherit your vacation home plan to continue doing this, it's a good idea to establish an LLC for the property. LLCs give you a measure of protection against being sued for incidents that occur on your vacation property. In the event of a lawsuit, the only assets that could be endangered would be those under the LLC. This provides protection for personal finances and other assets and belongings.
Once established, you can transfer ownership of the LLC to whomever you intend to inherit the property. This can be done all at once. If you want to take advantage of tax law gift benefits, however, you may find it beneficial to transfer ownership at a rate of $15,000 per year. This takes more time, but may be a better option financially. It can also be an easy way to transfer ownership to more than one person.
Create a Trust
Alternatively, you can use a trust to transfer ownership of the home. There are a few different options for creating a trust for your vacation home. A revocable trust can be amended during your lifetime but becomes irrevocable upon your death. An irrevocable dynastic trust may be another option worth considering. A qualified personal residence trust can be a good option to pursue if you intend to live in the home for a time before passing it on. This type of trust has the potential to reduce the gift tax value of the home, which can reduce the amount of gift tax the beneficiary is liable for. However, that benefit may go away if the owner passes away before the term of the trust is over. Make sure you clearly understand the terms of the trust when it is being drawn up. You should have an explicit understanding of how long the trust lasts, who the beneficiary or beneficiaries will be, and the terms upon which it is predicated.
Give It as a Gift
You might also consider giving your vacation home to someone in the family as a gift. This can be done through an outright transfer of the property title. You can do this in fractional shares if you want the ownership to pass to more than one individual. It's arguably one of the simpler ways of passing property on to others within the family. The downsides are that it doesn't provide much in the way of provisions for future property management. That could potentially lead to familial discord down the road. Additionally, those holding the title will be responsible for the cost of upkeep and maintenance. To reduce the friction that may occur in the future, consider adding a stipulation that owners must sign a written agreement detailing the future management of the property.
Liquidating the Asset
Of course, retaining the property and passing it down isn't always the best option for everyone. Those you want to inherit the property might not be in a position to take it. Sometimes the better option is to sell the vacation home, thereby liquidating the asset and providing you with cash you can disburse instead. This cash would still be subject to the gift tax, so it might be a good idea to spread out cash gifts over a few years until it's been distributed. A reverse mortgage might also be worth looking into if this is the route you want to go.
There are multiple ways you can include your vacation home in your estate plans. If it's going to be rented, establishing it under an LLC is a good idea. You might also consider creating a trust for it or giving it as a gift. There's also always the option of liquidating it as an asset. Which option will work best will depend on your circumstances. Make sure you take them into careful consideration when deciding how to include your vacation home in your estate plans.