The Multigenerational Family and the Vacation Home

SPECIAL SECTION — FAMILY WEALTH SERVICES

The Multigenerational Family and the Vacation Home

Strategies for peacefully sharing and passing down the family cottage.

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Berndt-Joel Gunnarsson, VINGBILD

Family cottages, cabins, compounds and vacation homes are often special, cherished places. Many owners like the idea of keeping property in the family and passing it down through multiple generations.

This is a wonderful idea, but careful (and preferably early) planning to address potential gift and estate taxes and property management issues — not to mention possible thorny personal and family issues, particularly with longer life expectancies and the increasing prevalence of multigenerational families — is essential to a smooth transfer of ownership and preservation of the family home as a source of enjoyment and treasured memories.

GIFTING OPTIONS

So how do you gift a residence? The seemingly most straightforward option, particularly given the currently sizable gift tax exemption ($5.34 million for individuals, and $10.68 million for married couples) is simply to gift an ownership interest in your property outright to your children or others you designate. This approach can be complicated if transfers are intended to be made to children who are minors, since they lack legal capacity to own real estate in their own names, although a trust or custodial account can provide an easy solution.

In many cases, gifting through a structure can make the most sense, particularly if you’re giving the property to more than one child or across multiple generations. Usually, this means that you first transfer the property to a limited liability company (LLC) or family limited partnership (FLP), in return for ownership in that entity. Thereafter, you may choose to gift ownership interests in the LLC or FLP to family members, rather than ownership in the property itself. These structures offer the ability to centralize control of the property in one or more managers, rather than with multiple owners. Not only can you name the managers and their terms of service, but you can also create management rotation among various family members.

Some property owners would like to continue using the property for some time, even after giving away all or some of it to family members. While this approach is understandable, it needs to be carefully thought out to avoid a hornet’s nest of estate planning concerns. In some cases, retained use would be consistent with a retained ownership interest in the property; in other instances, it may be wise to pay rent for the use of the property.

YOUR APPROACH NEEDS TO BE CAREFULLY THOUGHT OUT TO AVOID A HORNET’S NEST OF
ESTATE PLANNING CONCERNS.

Another strategy for an owner looking to retain use of the property for some time is a qualified personal residence trust (QPRT). The QPRT could offer significant leverage for gift-tax purposes, since the property’s value is reduced by the value of the retained right to live in it during the term of the trust. Maybe you give the home to your children but keep the right to live in the house for the next 10 or 15 years, at which point the property passes to your children outright or in further trust. But will you have to move out? Not necessarily. At the end of the term, the trust can be structured to continue for your children and also allow you to rent the property for its current rental value.

QUESTIONS TO THINK ABOUT WHEN ESTABLISHING A USE AGREEMENTClick to expand

BEYOND TAXES: THE USE AGREEMENT

So you’ve handled the transfer of your property to your heirs from a tax standpoint. You’ve even managed to work out how you’ll continue to use the property. Now the major issues often revolve around the sharing of the property.

To avoid conflict, it can be helpful to create a detailed written agreement about matters pertaining to the use and sharing of the property. This can be incorporated into the LLC documents, if you’re using such a vehicle, but it can even be created as part of the gifting process if you’ve decided an outright gift is more appropriate. The point is to create a document that everyone agrees on before you really need one.

At every stage of this process, it is important to work closely with experienced planning professionals. Creating an effective transfer plan, along with a clear and comprehensive use agreement, is key to ensuring that your vacation home is enjoyed today and for generations to come.

IMPORTANT INFORMATION

Any information presented about tax considerations affecting client financial transactions or arrangements is not intended as tax advice and should not be relied upon for the purpose of avoiding any tax penalties. Neither U.S. Trust and its representatives nor its advisors provide tax, accounting or legal advice. Clients should review any planned financial transactions or arrangements that may have tax, accounting or legal implications with their personal professional advisors.

Always consult with your independent attorney, tax advisor, investment manager and insurance agent for final recommendations and before changing or implementing any financial, tax or estate planning strategy.

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About PortlandHouseListings.com - Tom Ramsey, local Realtor

Local Portland Realtor with 10 years experience specializing in residential sales and investment property. Tom Ramsey Oregon Real Estate Principal Broker John L Scott Real Estate Phone: 503-481-0501 tomramsey1@gmail.com www.PortlandHouseListings.com
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