Many elderly clients wish to pass a specific residential property to their children or other heirs. The vacation home at the shore, for example, which the family has used for decades, simply has too many memories not to assure that it is kept in the family. Here are some of the techniques that might be used:
A qualified personal residence trust (“QPRT”) can provide a mechanism for passing on the house, even if estate taxes are not a significant concern. QPRTs are discussed below.
A testamentary trust could be used to hold the house for the benefit of future heirs. Now that New Jersey has eliminated the rule against perpetuities, the clients could bequeath the house to a perpetual trust, subject to generation skipping transfer (GST) and other tax considerations, which could hold the house for all future generations.
An inter-vivos irrevocable trust could be used. If the estate tax is a concern, the clients could use their annual gift exclusions ($13,000 per donee beginning January 2009) to make gifts. Gifts could be made directly to intended heirs, or to a trust for their benefit. A trust can afford better control, and thereby address issues of family dynamics, protecting the vacation home from an heir’s divorce, etc. However, if gifts are made to an inter-vivos family trust consideration of qualifying those gifts for the gift tax annual exclusion will have to be addressed. This will generally be done by incorporating annual demand, or Crummey powers, into the trust. The client should understand the potential issues these can raise if a disgruntled family member endeavors to exercise these rights and withdraw a partial interest in the vacation home. Also, considerations of how the trust will pay operating costs must be addressed. Consideration should be given to structuring the inter-vivos irrevocable trust to be a grantor trust, with the clients retaining the home ownership income tax benefits.
An inter vivos trust arrangement could be used to minimize probate concerns, provide a mechanism for control, assure that the dispositive intent won’t be undermined during a period of the client’s disability, etc. If the client will not face estate tax issues, a revocable trust will afford more flexibility than an irrevocable trust, and may be preferred.
A family limited partnership or limited liability company (collectively, LLC) can be used as a title holding vehicle for a family vacation home. For example, an LLC might be used to hold a second or vacation home that is rented for part of the season in order to provide insulation from liability. It might be used as a title holding vehicle, for example, to govern the ownership and use of a family farm or vacation property. An LLC might be used to avoid ancillary probate by converting a real property interest into an intangible asset. Caution: if you convert real estate owned by a New Jersey domiciliary in a state that has no estate tax into an intangible asset, you may inadvertently subject that theretofore non-taxable property to New Jersey estate tax. An LLC might also provide the needed structure and control for the family asset (e.g., by naming a specific senior family member as manager). However, from an estate tax minimization perspective, this is less than an ideal vehicle because the income tax benefits of home ownership would be lost, and in light of case law, the use of such an entity for a personal-use property is unlikely to be respected. See, for example, Est. of Reichardt v. IRS, No. 1224-98.
Be careful - state laws differ significantly. Tax laws change frequently.
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