How to Keep the Family Vacation Home in the Family

If this winter-like weather plus pandemic have left you wondering about how to get started on passing the family vacation home to the family or preparing to sell it in the future, you’ll need to understand how property is transferred. The details are shared in a useful article titled “Exit strategy for keeping the cabin in the family” from The Spokesman Review.

Two options to consider: an outright sale to the adult children or placing the cabin in a qualified personal residence trust. Selling the vacation home and renting it back from the children, is one way that parents can keep it in the family, enjoy it without owning it, and help the children out with rental income.

One thing to bear in mind: the sale of the vacation home will not escape a capital gains tax. It’s likely that the vacation home has appreciated in value, especially if you’ve owned it for a long time. If you have made capital improvements over that time period, you may be able to offset the capital gains.

The actual gain is the difference between the adjusted sales price (that is, the selling price minus selling expenses) and their adjusted basis. What is the adjusted basis? That is the original cost, plus capital improvements. These are the improvements to the property with a useful life of more than one year and that increase the value of the property or extend its life. A new roof, a new deck, a remodeled kitchen or basement or finished basement are examples of what are considered capital improvements. New curtains or furniture are not.

Distinguishing the difference between a capital improvement and a maintenance cost is not always easy. An estate planning attorney can help you clarify this, as you plan for the transfer of the property.

Another way to transfer the property is with the use of a qualified personal residence trust (QPRT). In this situation, the vacation home is considered a second residence, and is placed within the trust for a specific time period. You decide what the amount of time would be and continue to enjoy the vacation home during that time. Typical time periods are ten or fifteen years. If you live beyond the time of the trust, then the vacation home passes to the children and your estate is reduced by the value of the vacation home. If you should die during the term of the trust, the vacation home reverts back to your estate, as if no trust had been set up.

A QPRT works for families who want to reduce the size of their estate and have a property they pass along to the next generation, but the hard part is determining the parent’s life expectancy. The longer the terms of the trust, the more estate taxes are saved. However, if the parents die earlier than anticipated, benefits are minimized.

The question for families considering the sale of their vacation home to the children, is whether the children can afford to maintain the property. One option for the children might be to rent out the property, until they are able to carry it on their own. However, that opens a lot of different issues. They should do so for period of one year at a time, so they receive the tax benefits of rental property, including depreciation.

Talk with a qualified estate planning attorney about what solution works best for your estate plan and your family’s future. There are other means of conveying the property, in addition to the two mentioned above, and every situation is different.

Reference: The Spokesman Review (April 19, 2020) “Exit strategy for keeping the cabin in the family”

The Many Responsibilities of Inheriting a Home

When you inherit a home, there are three key factors to consider: the financial and legal responsibilities of the home, the tax liabilities of the home and what you’ll eventually do with the home. All of these different things relate to each other, explains Million Acres in “A Guide to What Happens When You Inherit a House.”

Let’s look at taxes first. There’s no federal tax associated with inheriting a house, but some states have inheritance taxes. For most situations, this inheritance does not lead to an immediate tax liability. When a property is inherited, the IRS establishes a fair market value for the property, which is the new basis for the property. This is a step-up basis. It is the valuation that is used to set future taxes, when the property is sold.

Capital gains are a tax relating to the profits generated from selling an asset, in this case, a house. The step up in basis means the heir only has to pay capital gains taxes, if the home is sold. The taxes will be the difference between the fair market value set at the time of the inheritance and the selling price.

If the property has a mortgage, heirs will need to know what type of mortgage it is and if it is assumable or due on sale. Most mortgage companies allow heirs to take over the payments, according to the original loan terms. However, if there is a reverse mortgage on the home, the unpaid balance is due when the person who took out the reverse mortgage dies. This usually requires the heirs to sell the home to settle the debt.

The condition of the inherited home often determines what heirs decide to do with the house. If it hasn’t been maintained and needs major work, it may be easier to sell it as-is, rather than undertake renovations. Heirs are responsible for taxes, insurance and maintenance. However, if the house is in good shape, it may make sense to keep it.

What happens when siblings inherit a house together? That can get complicated, if each person has a different idea about what to do with the house. One may want to sell now for cash, while another may want to rent it out for income. What ultimately happens to the property, may depend on how well the siblings communicate and make decisions together.

Often the best option is to simply sell the home, especially if multiple heirs are involved. Note that there are costs associated with the sale of the house. This includes any outstanding debts, like a mortgage, the cost of fixing up the home to prepare it for sale, closing costs and fees and real estate agent commissions. If there is a profit on the sale of the home from the tax basis at the time of inheritance, the heirs may need to pay short-term or long-term capital gains tax, depending on how long they held the property.

Talk with an estate planning attorney about managing the sale of the family home. They will be able to guide you, advise you about taxes and keep the family moving through the process of settling the estate.

Reference: Million Acres (December 4, 2019) “A Guide to What Happens When You Inherit a House”

Here’s Why You Need an Estate Plan in 2019

The New Year sees young adult clients calling estate planning attorney’s offices. They are ready to get their estate plans done because this year they are going to take care of their adult responsibilities. That’s from the article “Estate Planning Resolutions for 2019: How To Be A Grown-Up in The New Year” in Above The Law. It’s a good thing, especially for parents with small children. Here’s a look at what every adult should address in the New Year:

Last Will and Testament: Talk with a local attorney about distributing your assets and the guardianship of your young children. If you’re over age 18, you need a will. If you die without one, the laws in your state will determine what happens to your assets, and a judge, who has never met you or your children, will decide who gets custody. Having a last will and testament prevents a lot of problems, including costs, for those you love.

Power of Attorney. This is the document used to name a trusted person to make financial decisions if something should happen and you are unable to act on your own behalf. It could include the ability to handle your banking, file taxes and even buy and sell real estate.

Health Care Proxy. Having a health care agent named through this document gives another person the power to make decisions about your care. Make sure the person you name knows your wishes. Do you want to be kept alive at all costs, or do you want to be unplugged? Having these conversations is not pleasant, but important.

Life Insurance. Here’s when you know you’ve really become an adult. If you pass away, your family will have the proceeds to pay bills, including making mortgage payments. Make sure you have the correct insurance in place and make sure it’s enough.

Beneficiary Designations. Ask your employer for copies of your beneficiary designations for retirement accounts. If you have any other accounts with beneficiary designations, like investment accounts and life insurance policies, review the documents. Make sure a person and a secondary or successor person has been named. These designated people will receive the assets. Whatever you put in your will about these documents will not matter.

Long-Term Care and Disability Insurance. You may have these policies in place through your employer, but are they enough? Review the policies to make sure there’s enough coverage, and if there is not, consider purchasing private policies to supplement the employment benefits package.

Talk with your parents and grandparents about their estate plans. Almost everyone goes through this period of role reversal, when the child takes the lead and becomes the responsible party. Do they have an estate plan, and where are the documents located? If they have done no planning, including planning for Medicaid, now would be a good time.

Burial Plans. This may sound grim, but if you can let your loved ones know what you want in the way of a funeral, burial, memorial service, etc., you are eliminating considerable stress for them. You might want to purchase a small life insurance policy, just to pay for the cost of your burial. For your parents and grandparents, find out what their wishes are, and if they have made any plans or purchases.

Inventory Possessions. What do you own? That includes financial accounts, jewelry, artwork, real estate, retirement accounts and may include boats, collectible cars or other assets. If there are any questions about the title or ownership of your property, resolve to address it while you are living and not leave it behind for your heirs. If you’ve got any unfinished business, such as a pending divorce or lawsuit, this would be a good year to wrap it up.

The overall goal of these tasks is to take care of your personal business. Therefore, should something happen to you, your heirs are not left to clean up the mess. Talk with an estate planning attorney about having a will, power of attorney and health care proxy created. They can help with the other items as well.

Reference: Above The Law (Jan. 8, 2019) “Estate Planning Resolutions for 2019: How To Be A Grown-Up in The New Year”