Counseling Clients About Their Vacation Homes
Residential real estate is the largest asset class in the United States. Beyond its primary
function of providing shelter, housing provides a store of wealth and increases individual
economic growth. A residence - particularly a vacation property - can also have sentimental
value to a family.
Second homes are traditionally associated with wealthy Americans, but research shows that
vacation homes are no longer just a luxury for the rich. This means that more of your clients
than you think may benefit from a discussion regarding planning for multiple homes. The
finances and feelings tied up in a vacation home can present unique estate planning challenges
when a client is making plans to pass the home to the next generation. Family dynamics,
ownership structure, taxes, and more need to be considered in the transition.
Vacation Homes: A Source of Wealth - but Not Just for the Wealthy
Andrew Carnegie famously said that 90 percent of millionaires got their wealth from investing in
real estate. Those who are already millionaires are increasingly investing in second homes.
Having more than one home is now the norm for wealthy Americans. But it is not only wealthy
Americans buying second homes.
According to a recent survey, 4 out of 10 Americans now own vacation homes.1 The National
Association of Home Builders puts the national stock of second homes at 7.15 million,
accounting for around 5 percent of all housing.2
Investing in a vacation home can be surprisingly affordable. Most survey respondents reported
paying less than $200,000. And the return on investment can be impressive.
Vacation Home Estate Planning Strategies
While real estate often accounts for a large share of a client's net worth, their second home may
also be where family gatherings take place. Estate planning becomes more challenging in
situations where a treasured family asset changes hands. This can be doubly true when the
"treasure" is both tangible and intangible.
The first step in formulating an estate planning strategy for a vacation home is to determine the
client's goals. The following questions can help guide your discussion:
- Are they ready to pass the vacation home to their loved ones now, while they are
alive, or are they planning to transfer it when they die? Their preference may depend on
how much time they still spend at the property and whether they think their loved ones are
ready to take on the responsibility and expense of managing it.
- What is their preferred method for transferring the vacation home? Some options
include selling it to a loved one, gifting it to them, passing it down through their will, using a
transfer-on-death deed, or placing the home in a trust. Each of these methods comes with
different tax savings and liabilities.
- Who will have an interest in the property? The more family members who have a right to
use the home, the more detailed the planning should be. Without a structure that addresses
issues like who is responsible for paying for upkeep, taxes, and insurance, and without
defining property usage rules, co-ownership rights and responsibilities could become
unclear, leading to conflicts.
- Do they want to set any limits on what can be done with the vacation home? The
client, for example, should consider whether the vacation home can be used as a rental, if
family members have the right to sell the vacation home or their interest in it to people
outside the family, and conditions for one family member buying out another's interest.
Once you define your client's goals for the vacation property, you can help them come up with
appropriate planning strategies. During your discussion, address the following additional
considerations:
- If the property is mortgaged, they may need permission from the lender to transfer it.
- A trust can allow the client to maintain control by enabling the client to set rules about how
the property is to be used and maintained. They can also transfer money into the trust to
pay for ongoing expenses. The trust can be designed so that the client retains the right to
use the vacation home until death, at which point it passes to their loved ones.
- Clients can also establish a life estate that allows the vacation home to be transferred at
their death while allowing them to continue using it until they die.
- A business entity such as a limited liability company (LLC) or family limited partnership
(FLP) could be created to own the home and potentially provide some asset protection.
- Clients need to consult with a tax professional to ensure that federal gift, estate, and
generation-skipping transfer taxes; income and capital gain taxes; state-level estate and
inheritance taxes; and state and local property taxes applicable to transferring and owning
the property are properly considered in the vacation home succession plan.
- Vacation homes in another state or country pose additional estate planning challenges and
will likely necessitate local counsel or advisors.
- If there are children who are not interested in owning the vacation home, the client may want
to consider how they will equalize their children's inheritances if treating everyone equally is
an estate planning priority.
Connect with Our Family of Estate Planning Advisors
It might seem like a simple decision to keep a vacation home in the family. But estate planning
is rarely straightforward. Deciding how to handle a property that has served as a past gathering
place - and hopefully a future one - can prove to be especially complicated.
Whether a vacation home has been in a client's family for generations or just a few years, it
needs to be thoughtfully addressed in their estate plan. For advice on counseling clients about
vacation home legacy strategies, reach out to our estate planning attorneys.
MEREDITH | PC
4325 Windsor Centre Trail
Suite 400
Flower Mound Texas 75028
214-513-1013
This newsletter is for informational purposes only and is not intended to be construed as written advice about a Federal tax matter. Readers should consult with their own professional advisors to evaluate or pursue tax, accounting, financial, or legal planning strategies.
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