Family getaways for generations to come

Summers at the lake house, winters at the ski lodge and time spent at family vacation homes create special memories. Consequently, many families wish to ensure such retreats are preserved for the next generation fairly and equitably.

Keeping vacation homes in the family can be challenging due to the legal and tax implications of wealth transfer, not to mention the emotional considerations of family members. However, planning ahead and good communication can ensure enjoyment for generations to come.

The transfer of vacation homes can take many forms, with differing costs and benefits. Owners often face a tradeoff between simplicity and security, so they must carefully consider the best approach for their circumstances.

The easiest and most common method of transfer is a “fee simple” transfer of deed, which typically only requires filings in county records. However, it lacks the protections of more formal structures and can leave the property exposed to intra-family disputes and creditor risk. It also provides no clarity as to the property’s proper use and maintenance, which can ultimately become a source of discord.

In comparison, revocable living trusts can provide more certainty over use and maintenance, with the parents/grantors able to act as trustees, and appoint co-trustees and successors to act upon their death or disability. The transition of financial responsibilities to children can add complications, however, by creating gift tax issues when children contribute funds for maintenance or repairs. Such vehicles may not be optimal if multiple parties are responsible for the property’s financial obligations.

Parents interested in minimizing transfer taxes may consider a Qualified Personal Residence Trust (QPRT), which is an irrevocable trust created solely for transferring a personal residence to family members. The vehicle allows parents the right to live in the home for a set number of years before it passes to children either outright or in trust.

While offering gift tax advantages and continued income tax benefits from deductible costs, parents must outlive the trust term to shield the value of the property from estate tax. Additionally, parents hoping to pass the property down more than one generation should consider alternatives as the QPRTs do not allow for an efficient allocation of generation-skipping tax (GST) exemption. Finally, assuming the parents survive the trust term and wish to live in the property, they must pay fair market rent to the trust, an obligation they may feel uncomfortable with.

Limited liability company (LLC) or family limited partnership (FLP) structures are other options that offer the ease of transferring ownership interests to children while still maintaining control as managing member or general partner. Such structures provide for operating agreements to govern the property’s management, use and maintenance. They can also include provisions to protect against conflict, divorce and property division to ensure the vacation home stays in the family. However, the administration of such agreements is relatively onerous, requiring clear records of contributions, expenditures and management decisions. Further, these entities are state law-specific, so coordination with your attorney is critical to arriving at a sound approach.

Multigenerational trusts may be preferable for families who wish to preserve the vacation home for multiple generations and guard against the possibility of the home being exposed to future transfer tax liabilities. Trustees and successors should be selected with the long timeframe in mind for which the trust is intended. A family entity, such as the aforementioned LLC, can be used to guide the family co-trustees in their management decisions.

There are a variety of options available to transfer property to the next generation, and the current environment creates additional opportunities for gifting. The Tax Cuts and Jobs Act of 2017 created a significantly increased lifetime exemption amount until December 31, 2025, which could mean more flexibility in gifting, depending on the approach you choose. Navigating the legal and tax aspects while balancing the emotional needs of family members can be a challenge for parents passing on property. However, a bit of forward planning can ensure the best outcomes for children and ensure the vacation home is enjoyed peacefully for generations to come.

Research from CIO GWM is provided by UBS Financial Services Inc. UBS Financial Services Incorporated of Puerto Rico is a subsidiary of UBS Financial Services Inc. In Canada, research from CIO GWM is provided by UBS Investment Management Canada Inc.

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