You can pass on a gift of $11.4 million under the new tax laws, without paying federal estate tax. However, that window will likely close and can close soon, according to Barron’s Penta in “What to Know When Gifting the Family Vacation Home.” Those who can, may want to take advantage of this window before the exemption sunsets to about $5 million (adjusted for inflation) in 2025.
At issue for potential gifters is that, when someone transfers property, the recipients must account for it 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 taxes only on $4 million, if the recipient were to sell the stock.
Advice given to wealthy individuals is to make use of that higher estate tax exclusion while it’s still in place, and that may include property that 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. There’s no sense going through all the required processes unless they plan on enjoying and maintaining 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 the use or control of 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. There are several kinds that would work for this purpose. Another is to consider a Limited Liability Corporation, which also serves to protect the family’s assets against any claims if someone were to be injured on the property. The parents would transfer the property into the LLC and give children interests in the company.
A fairly common structure for vacation home ownership is called a Qualified Personal Residence Trust (QPRT). These are used by families who want to retain the right to continue using the home, usually for the rest of their lives. The property is transferred to the designated beneficiaries at death. If it is set up properly, a QPRT avoids any income or estate taxes.
A trust also lets an individual or a couple to specify 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.
An estate planning attorney can advise you on creating an estate plan that fits your specific circumstances and can include passing on vacation property.
Reference: Barron’s Penta (March 31, 2019) “What to Know When Gifting the Family Vacation Home”