Since family vacation homes often provide a refuge for family members to gather and enjoy one another’s company, parents are often in search of ways to keep these properties in the family. Before implementing such planning, however, parents should gauge whether there is sufficient interest from the next generation in retaining ownership. If there is, parents should consult with an estate planning attorney about the methods available for transferring the property to the next generation. These family discussions should include a plan to fund the transfer with cash, possibly from life insurance or investment accounts to act as seed money to help maintain the property.
Creating a “Family LLC” is an increasingly common and popular way to transfer a family vacation home to the next generation. When an LLC is used the transfer is in the form of ownership interests in the LLC. In many cases, such interests are gifted over a number of years, using the annual exclusion for taxable gifts. There are gift, estate tax and probate factors that favor using an LLC to transfer a family vacation home, but the most important reason to use an LLC is that it will create an established and flexible framework for transferring the property. This is because the LLC documents will include an operating agreement. The operating agreement will be the “play book” for managing the property, and it can be revised, from time tom time, to address changed circumstances.
Among other things, the operating agreement will appoint managers for the property (often members of the LLC) who will: i) collect “dues” from members; ii) pay carrying expenses; iii) make decisions about repairs; iv) schedule use of the property by members, and v) rent the property to third parties. In addition, the agreement sets forth the procedure for a member to transfer his or her membership interest, as well as for the LLC to sell the property if a majority of its members wish to do so.
A formal appraisal of the property is highly recommended and should be completed prior to the transfers, and if transfers exceed the gift tax annual exclusion per donee, then a Federal Gift Tax Return will need to be filed.
Author: Attorney John Polgrean
This blog is intended for informational use only. The information contained herein should not be construed as offering legal advice or a legal