Planning to pass on a vacation home to your family can be challenging. However, at least for estate taxes, it doesn’t need to be. The generous exclusion that allows wealthy individuals to gift up to $15 million and not get hit with federal estate taxes. Revisiting the Article “What to Know When Gifting the Family Vacation Home” from Barron’s Penta.
At issue for gifting property is that when someone transfers property, the recipients must account for related taxes, based on the original price paid for the property. This is known as the basis. For example, shares of stock valued at $5 million today that were originally purchased for $1 million 10 years ago would be subject to income tax on $4 million if the recipient were to sell them.
The advice given to wealthy individuals is to make use of that higher estate tax exclusion while it’s still in place, which may include property they expect to gift to beneficiaries. The most likely asset would be the family vacation home, whether it’s a ski chalet or a beach house.
First, make sure your children want the property, and if leaving property to children jointly, include clear guidance about a time frame within which some children can choose to opt out. If a child will likely not use the home, should they be given something else? There’s no sense going through all the processes unless they plan on enjoying the vacation home. Next, figure out the best way to gift the home while making the most of the high exclusion.
A nice point: you won’t have to give up use of or control over the house during this process. Experts advise not making an outright gift. This can lead to less control or the loss of a share to a child’s spouse in the event of a marital split.
Another option: transfer the property into a trust and set up rules for who will be in charge and how usage can be coordinated.
A trust lets an individual or a couple be very specific about how the property will be used, who can use it, and any rules about how they want the home maintained. Making sure that a beloved family vacation home is well cared for and not rented out for college parties, for instance, can provide a lot of comfort for a couple who have poured their hearts into creating a lovely vacation home.
Thinking through the options and setting them out can help preserve the relationships you have worked a lifetime to foster. With proper planning, the vacation home can be an ongoing blessing for the family instead of a source of tension. What is the path to exiting for a child who needs funds for their own family or retirement, without making them the “bad guy” for ending the cherished family memory vault?
Speak with an experienced estate planning attorney to learn how you can take advantage of the current federal estate tax exemption to pass your family’s vacation home on to the next generation.
Reference: Barron’s Penta (March 31, 2019) “What to Know When Gifting the Family Vacation Home”