Advice: How to keep your real estate in the family

If you haven’t yet given thought to what will happen to your vacation home (or other real estate) once you’re gone, please read on.

Mere ownership of real property can trigger not-so-pleasant things, such as creditor claims, unnecessary probate, additional taxes and -- most importantly – ugly family disputes.

But at some point, you’ll need to think about passing along your property and about the best way to do that.

There’s no one right way to handle such property during the estate planning process. Some options:

Sell the property outright

You can sell the vacation home directly to your children – a  straightforward solution that increases your capital liquidity while freeing you from the burden of property taxes and maintenance expenses.

Establish a life estate

In this scenario, you transfer the home to your children now, but are able to continue using it for the duration of your life. Remember, though, in this case the vacation home will still be included in your estate for tax purposes.

Gift the property
over time

If you’re not concerned about reaping any financial benefits from the sale of the property, you can gift it to your children.

To avoid gift taxes of up to 40 percent, you can gift portions of the vacation home (up to the federal annual limit) over the course of multiple years. This does involve a little extra work with yearly appraisals, but you can use tax valuation discounts.

Establish an LLC

A Limited Liability Company (LLC) can be used to both reduce your taxable estate and give your children partial ownership of the home. So long as you retain a majority of the ownership, you can designate the rest to your kids while retaining the ability to make all of the important decisions about the property.

Go with a trust

You can use a professional or personal trustee (a professional one can often help avoid internal family drama). There are three primary types of trusts:

• A revocable (or living) trust allows you to maintain full control of the property while designating your children as the ultimate beneficiaries.

• An irrevocable trust cannot be altered; and after you’re gone the property remains in the trust rather than passing to your kids. This arrangement helps protect the property against any claims from creditors.

• A qualified personal residence trust (QPRT) allows you to transfer the property into a trust, but continue to use it for a predefined number of years. This type of trust will reduce your taxable estate and lower the gift tax value of the home, but timing is of the essence. If you outlive the terms of the trust, the property is passed to your children. If you die before the end of the QPRT term, the property reverts to your estate and is subject to the terms of your will.

An additional benefit of most trusts is that if you owned out-of-state real estate in your name, you can avoid an additional probate process that must be held in the state where the property is located.

Sell the property,
split the proceeds

If all of the above approaches sound like they might lead to unintended strife between siblings, there is an even more straightforward way to handle vacation homes and other property in your trust. You can simply stipulate that, upon your passing, all properties are to be sold at market value, and the proceeds from the sales split equally. Depending on the nature of sibling relationships in your family, this may be the kindest and most sensible approach.

Trust me – we’ve seen far too many families torn apart, fighting in court because there were no clear instructions in place for handling real estate, especially after one passes. It’s heart breaking.

Whether you want to avoid family strife, probate, tax or potential creditor issues, you really must include instructions for how you want your real estate to be handled. And you really should do it now.

Brendan Daly is a principal at the law firm Czepiga Daly Pope & Perri, located at 15 Massirio Drive in Berlin. His firm provides estate planning, elder law, probate, litigation and special needs planning services.


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