Start Planning Now to Keep your Family Home in the Family with these Straightforward Strategies.

People tend to light up when they talk of their vacation homes because of all the great memories. It’s often the case with a childhood home that has been kept in the family. The question is how do you keep the childhood home or vacation home in the family? Well there are several ways to consider:

  • Outright Sale to Family Members

Perhaps the simplest way to transfer a cherished home is an outright sale. However, if the home has been in the family for some time and it has appreciated there may be a capital gains tax, especially if it’s not the primary residence where a capital gain exclusion may apply. Currently the capital gains tax rates is 15% for most people. However, this rate is schedule to jump to 20% in 2013.

  • Sell the Home to an Intentionally Defective Irrevocable Trust

The Intentionally Defective Irrevocable Trust (IDIT) takes advantage of the differences between the income tax and estate tax treatment under the Internal Revenue Code. The IDIT is drafted so that the grantor (person establishing the trust) remains the “owner” for income tax purposes, thus the reason it’s “defective” because the grantor retains certain powers over the trust. However, putting the home into the IDIT avoids gift and estate tax.  Typically the grantor sells the home to the IDIT for a promissory note and the interest rate is the “applicable federal rate” published by the IRS. This is a very simplistic explanation for a sophisticated planning tool, but may be well worth investigating for the right client.

  • A Simple Bequest of the Home

With the current personal one-time gift exemption set at $5 million, again set to expire for 2013, a simple bequest to family members without any formal structure is a simple way to transfer the home. Usually when the first major expense comes up – roof repair, major plumbing problem – the need for a more structured approach become necessary between the shared owners. Home ownership also creates home responsibility.

  • Establishing a Revocable Trust

Establishing a revocable trust is a very good idea regardless of any of the other options you might consider. There is a lot of flexibility with the use of a revocable trust. You can establish the rules and responsibilities without going the route of a formal corporate structure. There are also ways to protect the home from the potential creditors of the family members who are beneficiaries.

  • Placing the Home in a LLC

One of the benefits of an LLC is asset protection. If a friend comes onto the property and they get hurt the liability is limited to the property and doesn’t expose the family members other assets. Of course a good homeowner’s insurance policy with appropriate liability limits should be the first line of defense.

  • A Qualified Personal Residence Trust

The Qualified Personal Residence Trust (QPRT) is another way to take advantage of tax benefits. The grantors gift the property but retain the right to use it for a set term of years. This is the grantors retained interest. The home is appraised at fair market value and the value of the gift to the QPRT is the fair market value less the retained interest. It’s important that the grantor outlive the term for the retained interest, otherwise the home will be included in the grantor’s estate for estate tax purposes and defeat the whole purpose of the QPRT. Again, careful planning is key.

  • Having an Open and Honest Conversation

Before you go to the effort of investigating the best plan to transfer the vacation home or childhood home, you should sit down with your children and even grandchildren and find out if they hold the same sentiments toward the home as you do.

Part of the conversation needs to include the ongoing responsibilities of the home. Explain the ongoing need for repairs, keeping up the insurance and paying the utility bills and property tax. And discuss who will be responsible to oversee these issues and how these costs will be shared. There will also need to be a discussion about how to share the property between multiple family units.

You may come to the conclusion as a family that keeping the home in the family isn’t a top priority. As your children’s families grow and move away, change happens and keeping the home isn’t as important. It’s better to learn this now instead of springing it on your family. A good attorney will strongly suggest you have this conversation before proceeding with a sophisticated plan. You might even ask the attorney to have a family meeting to discuss what you want to do and allow him or her to answer questions about the technical areas of a given plan. That would be a great way to include your children and educate them as well.

If the expenses are the only concern, then consider establishing an endowment that could pay the expenses or at least help reduce them. A life insurance policy could be used to establish an endowment with a trust being named as the beneficiary.

There should also be an agreement established that lays out how expense will be apportioned, who will be the decision makers, if family circumstances change how will the home be transferred or sold. These are all very important areas to discuss openly with your family during the planning process.

There are many options available to you in Keeping Your Home in the Family. Call us to help you with these decision or find a trusted advisor in your area, it will be worth it.