Publication

February 2008Newsletter

Planning for the Transfer of Ownership of the Family Vacation Home

Wealth Planning Update

A vacation home, wherever located, can be a continuing source of enjoyment for many generations of family members; however, issues can arise when the owners of such home begin to contemplate the transfer of the home to a younger generation of family members. Discussions regarding management, use, and payment of expenses should be taken into account prior to making a transfer of the vacation home.

Written agreements concerning the management and use of the property may be entered into when transferring a vacation home whereby the original owners set forth how the home is to be maintained, who will pay for such maintenance, and how use of the home is to be scheduled among family members. The original owners should also address whether family members have a continued interest in keeping the home in the family and are able to financially afford ownership of the home. Tax considerations will often also play a part in determining when and how to transfer a vacation home. Once these areas have been discussed, there are several ways by which a vacation home can be transferred. Two transfer strategies are discussed below.

Qualified Personal Residence Trust.

Homeowners can transfer a vacation home to an irrevocable trust known as a Qualified Personal Residence Trust (“QPRT”). Transferring a vacation home to a QPRT provides the original owners with the continued right to use and maintain control over the home for a set term of years, determined in advance by the owners, while also permitting the owners to transfer the home to their children or other family members at the end of the term of years.

There is currently an exemption from gift tax of $1,000,000 per person, which would allow each homeowner to gift up to this amount without paying any federal gift tax. By transferring a vacation home to a QPRT, the owners are essentially making a gift of the home to the trust for the benefit of children or other family members at a reduced gift tax cost. The value of the gift of the home is only treated as the value of the beneficiary’s right to take possession of the home at the end of the term of years, rather than valuing the gift at the fair market value of the home when placed in the QPRT. This gift may be discounted further in value if a husband and wife, owning the home together, create separate QPRTs with their undivided interests. As long as the original owners live beyond the set term of years, any appreciation of the home during the term of the QPRT will be removed from the owners’ estates and will pass to the beneficiaries. If the owners wish to continue to use or live in the home after the term of years is complete, they must pay fair market rent to the new owners of the home (the beneficiaries of the QPRT).

Family Limited Liability Company.

Homeowners can also transfer a vacation home to a family limited liability company (“LLC”), keeping in mind that there must be a legitimate business purpose supporting the use of a LLC, such as the management of the property. In addition, formalities such as strict record keeping must be followed or the vacation home may still be considered to be fully owned by the original owners.

Ownership of the home is transferred to the LLC and shares of the LLC can then be held by the original owners and/or given to children or other family members who are interested in owning and maintaining the home. Transferring interests in a LLC can also result in gift tax savings due to the fact that fractional interests in the LLC are gifted to the beneficiaries, taking into account discounts for minority interests and lack of control.

When establishing management of the LLC, the original homeowners can decide whether management should be conducted by all members of the LLC or remain in only the original owners. The original owners thus have the ability to maintain control of the home, if so desired, while at the same time transferring significant ownership interests to other family members. The gifting of LLC interests may also be done over time, providing for a gradual transfer of responsibility to the younger generation without the original owners losing complete control.Advance planning between older and younger generations of family members can assist in the transition of ownership of a vacation home and can address issues best considered before a transfer occurs.

For more information on the planning and transfer of a vacation home, please feel free to contact Sarah Ehrhardt at 414. 225.4993, or snehrhardt@michaelbest.com or any member of the Wealth Planning Services Practice Group.

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