A vacation home can provide countless family memories over the years. When you start to envision your legacy, vacay property may be a part of it. In this post, we will provide some important information about estate planning and vacation homes.
Do Your Children Really Want the Home?
The thought of your children and their families enjoying quality time at the vacation home after you are gone may be heartwarming. At the same time, your children may have different ideas.
For example, let’s say that you have a house at the beach that is worth $2.5 million. Your children are not financially needy, but they are not wealthy. They are sending their own children to college, and the bills are considerable.
Under the circumstances, the liquidity may be far more attractive than the luxury of the vacation home that will rarely be used. Plus, all families are not perfectly harmonious. It can be complicated for some siblings to divide their respective ownership interests.
We are just providing some food for thought. There are vacation homes that have been in families for generations, and this is a beautiful thing. However, there is a big picture to take into consideration when you are planning your estate.
Beware Of Estate Taxes
Valuable property can be subject to estate taxes. There is a federal estate tax with a 40 percent maximum rate. It is applicable on the portion of an estate that exceeds the exclusion. In 2022, the federal estate tax exclusion is $12.06 million.
You would logically consider lifetime gift giving to get around the estate tax. People used to do this shortly after the estate tax was enacted in 1916. However, since 1932, there has been a gift tax in place continuously. It is unified with the federal estate tax.
As a result, the $12.06 million exclusion includes large lifetime gifts along with your estate.
Here in Connecticut where we practice, there is a state-level estate tax with a $9.1 million exclusion. We also have a gift tax, and Connecticut is the only state among the twelve states with estate taxes to have a gift tax.
There are steps that you can take to mitigate your exposure if you work with our firm. For example, when it comes to home ownership, a qualified personal residence trust can be a solution.
After you convey the home into the trust, nothing changes with regard to your ability to use it as usual for a particular prescribed term. This is called the retained income period. You name a beneficiary to assume ownership of the home after the term expires.
This transfer would be subject to gift taxes. However, the value of the gift would be significantly discounted. No one would pay full value for a home that they did not own for a certain number of years, and the IRS takes this into consideration.
Don’t Use a Simple Will
If you use a will to facilitate asset transfers after you are gone, the executor you name would admit the document to probate. This is a legal process that transpires under the supervision of a court.
It will take typically take eight or nine months at minimum, and the beneficiaries receive nothing while the estate is being probated. Expenses that are incurred reduce the value of the estate, and I is a public proceeding, so the records are available to interested parties.
One probate process is quite enough, but the situation is magnified if you own a vacation home out-of-state. If you are going to transfer it through the terms of a will, there would be a separate ancillary probate process to complicate matters further.
It is best to arrange for the transfer through the utilization of a trust. If estate taxes are not a concern, a revocable living trust can be a good choice for probate avoidance, and there are other benefits.
We Are Here to Help!
Today is the day for action if you are going through life without an up-to-date estate plan. You can schedule a consultation at our Glastonbury or Westport, CT estate planning offices if you call us at 860-548-1000. There is also a contact form on this site you can use to send us a message.
Mr. Nirenstein is licensed to practice before the courts of the State of Connecticut and the United States District Court. He is a member of the Connecticut and Hartford County Bar Associations, and the Estate and Probate, Elder Law, Business Law and Real Estate Sections of the Connecticut Bar Association.