Passing along property can have significant tax consequences if done wrong.
You have a vacation home.
Perhaps it is a cabin.
Maybe it is a beach condo.
Either way, you want to keep it in the family.
This will not happen without planning.
According to the recent Financial Planning article titled “Save clients from tax pitfalls, family strife when passing on that lake cabin,” you could cause arguments and divisions.
It may seem nice to keep the vacation home for family gatherings.
They may simply want cash.
How can a family member who wants to keep the vacation home ... keep the vacation home?
You could arrange for them to purchase the shares from their siblings.
In other words, give them a "right of first refusal" to purchase before the property would ever be offered to a third party.
What if this family member does not have enough money to exercise this right?
You could put the home in an irrevocable trust.
This could create a future capital gains tax burden for your children.
What happens if you do simply sell your home?
You could take a huge tax hit.
Vacation homes do not qualify for the $250,00 (if single) or $500,000 (if marriage and filing jointly) capital gains tax exclusion.
How much could you be taxed?
You could be taxed at 20 percent for the long-term capital gain and have a 3.8 percent surtax on net investment income.
Leaving the vacation home to your children will allow you to avoid income tax and the capital gains tax.
The vacation home, along with your other assets that have appreciated in value, will enjoy a new step up in basis to the value on your date of death.
All that aside, practically speaking, your children may have discussed this situation amongst themselves already.
Regardless, communicate with your children about your estate planning wishes early and often.
By doing so, you may be able to reach a favorable solution for everyone.
Work with an experienced estate planning attorney to determine the best option for your family.
He or she has likely been there and done that when it comes to intra-family estate planning matters.
Remember: “An ounce of prevention is worth a pound of cure.” When making your financial, tax and estate plans, do not go it alone. Be sure to engage competent professional counsel.
For more information about estate planning in Overland Park, KS (and throughout the rest of Kansas and Missouri), visit our estate planning website and be sure to subscribe to our complimentary estate planning e-newsletter while you are there.
Reference: Financial Planning (May 23, 2017) “Save clients from tax pitfalls, family strife when passing on that lake cabin”