THINKING ABOUT HOW you'll pass your beach house or mountain cabin along to future generations? Several factors will probably play major roles in what you decide. "You'll want to consider things like how many family members might end up with shares in it, their financial situations and yours, how long you wish to maintain ownership, and what the potential impact on your taxes might be," says Jeralyn Seiling, a managing director in Merrill Lynch's Wealth Structuring Group.
"Consider things like how many family members
might end up with shares in it, their financial situations and yours,
and what the potential impact on your taxes might be."
—Jeralyn Seiling Managing Director, Merrill Lynch's Wealth Structuring Group
Your financial advisor, together with your attorney and tax professional, can help you find an approach that serves your needs. Note that in each of the instances below, the transfer would be considered a gift for federal gift tax purposes; the current lifetime federal estate and gift exemption amount for 2018 is about $11.2 million for an individual and $22.4 million for a married couple. You are required to file a federal gift tax return for gifts during your lifetime, and you will also need to obtain an appraisal of the property at the time it is transferred.
These three possibilities are all worth considering, depending on your circumstances and wishes.
An outright gift
Often the easiest and most straightforward way to go, the gift option requires the least paperwork and involves transferring title to your children, or a setting up a trust for them, by executing a deed. You will be required to file a gift tax return to either claim the use of a portion of your federal estate and gift exemption amount, or if you’ve used up your gift exemption, to remit any gift tax due. While it’s unlikely that you’ll be looking at state gift tax consequences, you should consult with your attorney and tax professional when considering a gift.
A qualified personal residence trust (QPRT)
This can be an attractive estate planning device, potentially saving on federal estate and gift taxes. Here's how it works: When you transfer the house's title to a QPRT, you retain the right to live in the home for a specific length of time. During that period, you are responsible for all expenses, including real estate taxes and repairs. Once the specified time span ends, the house is generally transferred to your children. The value of the gift is the value of the residence minus the value of the interest you retain in the property. If you survive past the term specified in the QPRT, the property passes to your children free of federal gift and estate taxes.
Read “Why Make Your Heirs Wait?” for the latest trends—and tax facts—about giving to your kids.Read More
A family limited liability company (LLC)
With this option, you can pass ownership of the home to an LLC and then transfer interests in the LLC to individual family members. You should also have a detailed operating agreement for the LLC specifying who has access to the home and when, as well as who's responsible for taxes, upkeep and other expenses. An LLC can offer gift and estate tax advantages and, in certain circumstances, help you maintain control over the property even after you give shares to your children. In addition, you can spread out your use of your federal estate and gift exemption amount by giving LLC interests over the course of several years. You may also be able to avoid using some of your exemption by giving smaller interests of the LLC as annual exclusion gifts, which for 2018 is $15,000 per person you’re donating to.
3 Questions to Ask Your Advisor
- If I want my house to be
shared among my heirs, what might be an effective way to transfer
- Would setting up a qualified
personal residence trust make sense for me?
- I’m inclined to make my
vacation home an outright gift to my heirs. Are there any
disadvantages to that in my case?
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Neither Merrill Lynch nor any of its affiliates or financial advisors provide legal, tax or accounting advice. You should consult your legal and/or tax advisors before making any financial decisions.
The investments or strategies presented do not take into account the investment objectives or financial needs of particular investors. It is important that you consider this information in the context of your personal risk tolerance and investment goals. Always consult with your independent attorney, tax advisor, investment manager, and insurance agent for final recommendations and before changing or implementing any financial, tax, or estate planning strategy.