Whether you own a cabin on a lake, cottage on a beach, or lodge up in the mountains, your vacation home is likely a favorite spot where you made a lot of memories over the years. As you age and find it harder to spend time there, it’s only natural that you’d want to keep this second property in the family and give it to your children.
There’s a lot to consider if you’re thinking about leaving your family vacation home to your children. After all, these types of homes can actually bring a lot of stress—not relaxation. That’s why it’s important to take inventory of all the costs associated with keeping and maintaining the home and discuss them with your children before you decide to bequeath it to them.
To help get the conversation started, here are three broad types of costs you may want to cover:
1. Maintenance & Upkeep
This is an easy one for people to grasp. Like any other house, your vacation property needs to be maintained. You likely have to pay for electricity to power the appliances, gas to heat the house, and utilities to the city for water, sewage, and trash removal.
If it’s an older property, there will likely be elevated costs to maintain the home. You (or your children) may even decide to spruce up the place with some updates or renovations. You likely even have homeowner’s insurance to pay for, and it’s possible you even have association fees.
As you discuss leaving the family vacation home to your children, make sure they’re aware of all the costs that go into simply maintaining the home. Provide a rundown of all your monthly, quarterly, and yearly bills, and remind your children that these costs are on top of what they’re already paying to maintain their own homes.
2. Intangible Costs
If you have multiple children who are planning on sharing the vacation home, there will inevitably be disagreements, which come at an emotional cost. It could be angst and squabbles over “booking the calendar” to use the home at certain times. It could be deciding who will manage the property and the associated financial aspects. Maybe one of your children lives halfway across the country and doesn’t feel like they should have to pay an equal share to use the property far less than their sibling(s).
Additionally, there’s a “time cost” that must be considered. If you don’t pay a maid service or property manager, certain chores or responsibilities will fall to your children as they take ownership of the house. They’ll need to take care of the lawn during spring, summer and fall. In the winter, they may need to clear snow off the driveway. If you have a wood-burning stove or fireplace, they’ll need to chop firewood.
These are all things that take time away from enjoying the vacation home but must be done. Make sure your children are aware of the work that must be put in to make the home a fun getaway for everyone.
3. Taxes
There are also taxes that must be considered. Not only are there property taxes that must be paid, but when your children inherit the house, there may also be estate and/or gift taxes.
However, if your children decide they’re okay with taking on the maintenance/upkeep costs and other intangible costs, there may be a way for you to easily transfer your property to them while also relieving them of a potentially hefty tax burden: establishing a Qualified Personal Residence Trust (QPRT).
What is a QPRT?
A QPRT is an irrevocable trust that allows its creator to remove a personal home from their estate. The purpose is to reduce the amount of gift tax that is incurred when transferring assets to a beneficiary.
You choose a term of ownership of the house. For example, let’s say you’re 65 and decide to set up a ten-year trust. After ten years, the trust dissolves, and the house is distributed to your children (who, in this example, are the beneficiaries you designated at the end of the term).
Once you place the house in the QPRT, you cannot take it back, as it is considered a gift that you have retained an interest in for the ten-year period. To prove that it’s a gift for tax purposes, you need to pay a market value rent to your children (the beneficiaries) and have gifted it to them, who then take ownership at the end of the ten-year term. You can continue to live in the house at the end of the term by paying rent but only if the new owners (your children) allow it. This can become an issue if your adult children predecease you and your son/daughter-in-law inherit the house.
Next Steps
If you find yourself thinking more about your legacy, it might be time to review and update your estate plan, including how to keep your vacation home in the family. Good communication with your children is essential to developing a good plan, so reach out to an advisor today to start a conversation on solutions for your family.
