Chautauqua Home Estate Planning

Estate Planning for the Family Vacation Home Providing for Generations to Come by Jay Abramson, Esq. REAL ESTATE agents develop close relationships with buyers of vacation properties and often gain an understanding of their client's desire to create a family retreat with the purchase of a second home. You can be very helpful to them by asking the right questions and perhaps suggesting they consult with their estate planning attorney after the contract to purchase is signed but before the closing is held. Planning before the property title is transferred is easier and saves costs in drafting new deeds for estate planning purposes. In preparing the purchase and sales contract, ask if they have a revocable living trust. See if they want title to the property in the name of the trust. See if a short consultation with their estate planning attorney may be helpful to answer these questions. Talking with the estate planning attorney about these considerations will be a real service to your clients and make you look good in the process. Passing ownership of a vacation home to children or grandchildren can take many forms. Deciding among the options must take into account a variety of considerations – ownership, management, gift taxes, estate taxes, and eventually capital gains tax. Making sure children "inherit" a vacation home may be as easy as signing a deed that will make children joint owners "with rights of survivorship". Typically these deeds are gifts to children and will often result in the filing of a gift tax return (although no gift tax is paid if cumulative lifetime gifts are under $1 million dollars). In this way, ownership is transferred upon death with no paperwork other than the filing of a death certificate in the land records. However, this ignores gift tax, estate tax, possible capital gains issues and more generally, management of the property over the long haul. For example, if the child(ren) choose to sell the vacation home after acquiring ownership by a gift deed, they will pay significant capital gains tax if the property has increased in value from the date of purchase. In addition, if some financial catastrophe happens to the child(ren) the vacation home may be vulnerable to creditors - an unintended disaster that is avoidable with estate planning. A Last Will and Testament controls the passing of legal title to property at death, including a vacation home. As part of a Will there should be some designation of who will inherit the vacation home. In order to take effect and transfer the property after death, the Will must be filed in the probate court and an estate opened up in the state of residence of the deceased person. Keep in mind that if a vacation home is in another state, the Executor (named in the Will) will have to open up an estate both in the state of residence and in the state where the vacation home is located. This can be costly and time consuming. A Revocable Living Trust (RLT) is a basic estate planning tool that allows for the management of property during lifetime and controls the distribution of an estate after death. A properly drafted, executed and funded RLT can avoid probate court altogether. RLTs name Trustees who are the person or persons in charge of the assets. The RLT also names the beneficiaries of the trust assets. Often an individual is both the trustee and beneficiary. The Trust will also designate who will be the trustee(s) after death or during periods of incompetence so there is continued management and control of property. The RLT can have special provisions for the vacation home. The plan of distribution in a RLT will have the named beneficiaries for the vacation home. You can also allocate a portion of your liquid estate to help beneficiaries with the expenses of the vacation home. If you would want your grandchildren to enjoy the vacation home, the RLT could name them as beneficiaries, keeping the vacation home in the trust until the grandchildren reach a certain age. After they reach that age the vacation home can be deeded to them by the Trustee. No court involvement at any level. The terms included in a trust are the directions that the trustee will follow. After a trust is drafted according to a desired plan and the trust agreement is signed, it is important to have a deed transferring the property into the trust signed and recorded in the land records, making the RLT the legal owner of the property. Use of a RLT to transfer the ownership after death has tax advantages as well. Often the vacation home has increased significantly in value from the date of purchase. The trust beneficiary(ies) takes the basis in the property equal to the fair market value of the property on the date of death. If the beneficiary(ies) now sells the property the capital gain is measured against the fair market value at date of death. Some people want to keep the vacation home in the family for generations to come and choose to establish a stand alone trust just for the vacation home. Provisions are made for management of the property. The trust can continue to benefit several generations. Depending upon the number of families using the vacation home you may want provisions for determining who can use the property, annual expense contributions and related provisions for the continued operating expenses. Another form of vacation home ownership becoming more popular is the Limited Liability Company. A company is set up solely for the purpose of owning and managing the vacation property. By-Laws are drafted that help to outline the management of the property. Limitations on the transfer of the shares of the LLC can be in place to make sure that owners of shares of the company are family members. The LLC can continue ownership for years without interruption. As with any type of formal LLC there are requirements that states impose upon them such as annual reports and tax filing that become additional costs. Keeping the vacation home in the family can be important to a client's overall estate plan. Often the vacation home is a gathering place that holds many memories for your clients, their children and grandchildren. When purchasing that home ask your client about how they want the ownership of the property, in their names, in a trust, with their children of perhaps a limited liability company. Suggest that they tell their estate planner they are purchasing a second home and want to know how best to deal with the ownership. For more information on Chautauqua Lake Real Estate & Living visit: www.chautauqualakehomes.com