How to Transfer Your Vacation Home to the Next Generation

How to Transfer Your Vacation Home to the Next Generation

Vacation homes hold a special place in families’ hearts. As an escape from the hustle and bustle of everyday life, a vacation home offers family members the chance to reconnect and make lasting memories together. It’s only natural that you would want to keep yours in the family. But when the time comes for you to think about passing your family vacation home on to the next generation, don’t let emotions get in the way of wise decision making. Make sure you and your heirs understand the practical and financial implications, as well as the options available to you.

Know your property’s value

You may already have a good sense of your vacation home’s worth if you were to put it on the market today. If it’s been a while since you’ve had an appraisal done, it may be helpful to schedule one before you open the discussion of property transfer with your heirs. Having a reliable baseline estimate can help all concerned parties better understand the property’s value.

In addition, document the expenses related to owning the home: property taxes, homeowners insurance, utilities, maintenance and repair costs, plus expenses related to any agreed-upon plans for renovation. Once all these costs have been tallied, you and your heirs can make well-informed decisions about whether keeping or selling the home makes more sense for the family.

Talk it over

For a decision this big, a family meeting is in order. Share the information about the home’s value and upkeep. Ask your children (or other heirs) if they are interested in inheriting the home and, if so, whether they will have the means to maintain it. If multiple heirs are interested in sharing the property, discuss how that might work and, ideally, put some details in writing. If you find that one of your children wants the home but the others would prefer a cash inheritance, you will need to determine a fair way to make sure every heir will receive assets of equal value.

Evaluate Your Options

Passing down a vacation home can be more complex than gifting or bequeathing liquid assets, due to the legal, tax and logistical implications of real estate transactions. Be sure to consult your private banker, attorney, tax consultant or other trusted advisors before making any final decisions about which option may be right for your family’s circumstances. Below are some of the options you may consider:

Bequeath the home through your will. Leaving your vacation property to your heirs by including it in your will may be easy for you but could be potentially difficult for your heirs. Such bequests are subject to the probate process, which can become time-consuming and relatively complex, particularly if the vacation home is in a state that’s different from that of your primary residence. Check the laws of your state to see if a Transfer on Death (TOD) deed may be available to you. This type of document allows your heirs to bypass probate court and automatically inherit the property upon your death.

Put the property into a trust. Transferring your property to a trust can help you avoid probate court, and your home passes quickly and smoothly to your heirs. You can choose a revocable living trust or a qualified personal residence trust (QPRT):

A revocable living trust enables you to retain control over your vacation property while you are alive, provided you appoint yourself trustee. Should you choose to name someone else trustee, they will be authorized to make decisions about the property. (You also need to name a successor trustee to assume this responsibility should you become unable to fulfill your role.) You can designate your heirs as either co-beneficiaries, receiving benefits from the property during, and after your lifetime, or residuary beneficiaries, to receive benefits only upon your death. A revocable living trust can be modified at any time.

A QPRT is an irrevocable trust (meaning it may not be modified unless all beneficiaries agree to the changes) that allows you to gift the property to your heirs at some future time. You retain the right to use it or live in it for a specified period of time — 10 or 20 years, for example — and then ownership is transferred to your heirs.

Create a business entity. By placing your vacation home in a limited liability company (LLC) or family limited partnership (FLP), you can transfer ownership to your heirs over time. An LLC or FLP can also help protect your property, shielding it from creditors’ claims, by separating it from your personal assets.

Gift or sell the home while you’re alive. You can gift the property to your heirs outright or sell it to one or more of your children. Be sure you understand the gift and real estate tax implications before deciding to go this route. For example, things can get complicated if you sell the home to your children at a cost below fair market value.

Share ownership. Adding your heirs to your property title so you become joint owners may simplify estate administration; however, it may entangle you in their financial affairs or cause rifts in the family due to disagreements about control.

Meet with your advisors

Consult with your attorney, tax consultant or wealth advisor about the pros and cons of the options available to you for passing down your vacation home. Then be sure your wishes are clear in your estate plan so that your property continues to bring joy to a new generation of owners. If you’d like support with custom credit solutions, including business entity LLCs, Dollar Bank would be happy to assist and provide a high level of personalized attention.

This article is for general information purposes only and is not intended to provide legal, tax, accounting or financial advice. Any reliance on the information herein is solely and exclusively at your own risk and you are urged to do your own independent research. To the extent information herein references an outside resource or Internet site, Dollar Bank is not responsible for information, products or services obtained from outside sources and Dollar Bank will not be liable for any damages that may result from your access to outside resources. As always, please consult your own counsel, accountant, or other advisor regarding your specific situation.