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”

From Gentle Persuasion to a No-Nonsense Approach, Talking About Estate Plans

Sometimes the first attempt is a flop. Imaging this exchange: “So, do you want to talk about what happens when you die?” Answer: “Nope.” That’s what can happen, but it doesn’t have to, says The Wall Street Journal’s recent article “Readers Offer Their Advice on Talking to Aging Parents About Estate Plans.”

Many people have successfully begun this conversation with their aging parents. The gentle persuasion method is deemed to be the most successful. Treating elderly parents as adults, which they are, and asking about their fears and concerns is one way to start. Educating, not lecturing, is a respectful way to move the conversation forward.

Instead of asking a series of rapid-fire questions, provide information. One family assembled a notebook with articles about how to find an estate planning attorney, when people might need a trust, or why naming someone as power of attorney is so important.

Others begin by first talking about less important matters than bank accounts and bequests. Asking a parent for a list of utility companies with the account number, phone number and if they are paying bills online, their password, is an easy entry to thinking about next steps. Sometimes a gentle nudge, is all it takes to unlock the doors.

For some families, a more direct, less gentle approach gets the job done. That includes being willing to tell parents that not having an estate plan or not being willing to talk about their estate plan is going to lead to disaster for everyone. Warn them about taxes or remind them that the state will disburse all of their hard-earned assets, if they don’t have a plan in place.

One son tapped into his father’s strong dislike of paying taxes. He asked a tax attorney to figure out how much the family would have to pay in estate taxes, if there were no estate plan in place. It was an eye-opener, and the father became immediately receptive to sitting down with an estate planning attorney.

A daughter had tried repeatedly to get her father to speak with an estate planning attorney. His response was the same for several decades: he didn’t believe that his estate was big enough to warrant doing any kind of planning. One evening the daughter simply threw up her hands in frustration and told him, “Fine, if your favorite charity is the federal government, do nothing…but if you’d rather benefit the church or a university, do something and make your desires known.”

For months after seeing an estate attorney and putting a plan in place, he repeated the same phrase to her: “I had no idea we were worth so much.”

Between the extremes is a third option: letting someone else handle the conversation. Aging parents may be more receptive to listening to a trusted individual, who is of their same generation. One adult daughter contacted her wealthy mother’s estate planning attorney and financial advisor. The mother would not listen to the daughter, but she did listen to her estate planning attorney and her financial advisor, when they both reminded her that her estate plan had not been reviewed in years.

Reference: The Wall Street Journal (December 16, 2019) “Readers Offer Their Advice on Talking to Aging Parents About Estate Plans”

Relocating for Retirement? What You Need to Know

Sometimes having too many choices can become overwhelming. Move closer to the grandchildren, or live in a college town? Escape cold weather, or move to a mountain village? With the freedom to move anywhere, you’ll need to do some serious homework. A recent article titled “Don’t Relocate in Retirement Without Answering These 5 Questions” from Nasdaq contains some wise and practical advice.

There are some regions that are more retirement-friendly than others. If you end up in the wrong place, it could hurt your retirement finances. Therefore, ask these questions first:

What are the state’s taxes like? If you are living on Social Security benefits, retirement savings and a pension, the amount of money you’ll actually receive will vary depending on the state. There are 37 states that don’t tax Social Security benefits, but there are 13 that do. There are also some states that do not tax distributions from retirement accounts. Learn the local rules first. If you currently live in a state with no income tax, don’t move to a state that may require a big tax check.

If you live in a high tax state and don’t have enough money saved for a comfortable retirement, then moving to a lower tax state will help stretch your budget.

Is there an estate or inheritance tax, and is that a concern for you? If leaving money to heirs doesn’t matter to you, this isn’t a big deal. However, if you want to pass on your assets, then find out what the state’s inheritance taxes are. In some states, there are no taxes until you reach a pretty large amount. However, in states with inheritance taxes, even a small estate may be taxed, with those who inherit sometimes owing money on even small transfers.

What’s the cost of living compared to where you live now? When you’re working, moving to a place with a higher cost of living is not as big a deal, since your wages (hopefully) increase with the relocation. However, if your cost of living goes up and your income remains fixed, that’s a problem. The last thing you want to do is move to a place where the cost of living is so high, that it decimates your retirement savings.

If you live somewhere with high taxes and high prices, moving to a lower cost of living area will help your money last longer, and could make your retirement much easier.

Is it walkable or do you need a car? Cars present two problems for aging adults. One, they are expensive to maintain and insure. Two, at a certain point along the aging process, it becomes time to give up the keys. If you live in a walkable community, you may be able to go from having two cars to having one car. You might even be able to get rid of both cars and do yourself a favor, by walking more. This also gives you far more independence, far later in life.

What’s healthcare like? Even people who are perfectly healthy in their 50s and 60s, may find themselves living with chronic conditions in their 70s and 80s. You want to live where first-class healthcare is available. Check to see what hospitals and doctors are in the area before moving. You should also find out if medical care providers accept Medicare. Consider the cost of a nursing home or home care in your potential new community. Some areas of the country have much higher costs than others.

Reference: Nasdaq (Aug. 9, 2019) “Don’t Relocate in Retirement Without Answering These 5 Questions,”