As we transition out of our ski houses and start thinking about our beach houses, it is as good a time as ever to review the options for holding and managing a family vacation home.
While these properties can bring wonderful memories for families, they can also evoke stress and strain on family relations. There are several techniques available to help families organize and manage the family vacation home and to pass these homes to the next generation in the smoothest possible fashion:
1. An irrevocable trust—This technique works well when a family member owns a vacation property and wishes to pass it to the next generation as a gift, all at once or in stages. When an irrevocable trust is used, the trustee of that trust, usually an independent person, will have control over the vacation home on behalf of the family member beneficiaries. This can be a good solution when the grantor of the trust wants to relieve the family members of the burden of managing the property. With this technique, the grantor should also contribute plenty of cash to the trust so that the trustee will be able to use that cash to maintain the property indefinitely for the benefit of the family.
2. An LLC—This technique works well when a group of family members already owns the property together. Each family member contributes his or her interest to the LLC, and each family member has a corresponding ownership interest in the LLC. The LLC operating agreement, the terms of which have been agreed upon by the family members, will govern the management of the property. A manager of the LLC can be appointed to make the daily operating decisions, but the family member owners will have a say in larger decisions, such as renting or selling the property. The family members will also contribute proportionately to an LLC bank account, which will be used to cover everyday expenses.
3. A qualified personal residence trust—This technique (also known as a QPRT) is best used for a family member who wishes to make a gift of real estate to family members at a discounted value for gift tax purposes, but who also wishes to retain use of the property for a period of years. The gift tax value of the property is reduced using the QPRT technique based on the grantor’s life expectancy and the number of years he or she wishes to retain use of the property. The longer the term, the larger the discount. At the end of the term, if the grantor survives it, the property will pass to the designated beneficiaries. The grantor may continue to rent the property from the beneficiaries if all parties agree once the term ends.
Each of these techniques is unique, and each can be effective in the right circumstances to hold the family vacation home, resolve family issues and potentially save gift and estate tax.