What Do You Want To Do With Your Vacation Home?
If you have the good fortune to own two “homes,” one being your regular residence and the other you have regarded as your “escape,” the thought may have crossed your mind that one day you would surrender one of them entirely and continue on with the other. There are many reasons this might occur. Expense can be one of them. There are property taxes, homeowners’ insurance’s, repairs and other costs to name a few.
It is possible the commute could become annoying. I watch many vehicles traveling to and from summer vacation locations and cannot help but think that some of the drivers are traveling for a few days or weeks’ vacation only to return home to return to work. The adult children or grandchildren may spend more time there than the owners. Real estate is often an excellent investment but, like everything, it can come with a downside. Alternatively you could sell your “home” and move to your vacation spot.
If you keep your “escape” during life there is the question how to handle vacation properties as part of your estate plan. Summer is a great time to think of this. It could also be the time finally when you take a hard look into the future and develop a plan for the vacation home you worked so hard to buy years ago.
Part of estate planning is considering all your assets, not just bank and investment accounts.
Here are some points to know.
- You should consider addressing the vacation home in your estate plan. If, as most couples do, you leave your assets to your spouse entirely and then, on his or her passing, in equal shares to your children, each child receives a proportionate share. If you have more than one child this requires cooperation and agreement on their part. If you consider this in advance, one possibility, among others, is that adjustments might be made to the estate plan to roughly equalize the inheritances of the beneficiaries taking into account inheritance of the home by some and not all – in other words, a buy out..
- Where one adult child wants the vacation home and others do not you can build a right of first refusal into your plan. Your estate documents can provide a limited time when a son or daughter can buy the vacation home from the estate and a procedure to accomplish this. Funds to pay could be raised from that person’s remaining inheritance, from financing or even from a mortgage on her or his personal residence. Advance knowledge of your children’s desires can be very helpful in planning.
- Suppose your family wants to keep the vacation home in the family indefinitely. Some creative measures might be taken to continue a vacation home in the family indefinitely. You might place the house in a living trust during your lifetime or establish a trust through your Will. Although a living trust does not insulate assets from Pennsylvania inheritance tax where applicable, it can provide detailed instructions how the property is to be handled, how maintenance, repairs, property taxes and similar expenses can be handled and even describe what weeks or months it might be available to family members, whether and when it can be rented when not used by family and other similar matters. A more formal alternative could be to establish a Limited Liability Company (LLC) now that would continue after your passing. This arrangement can provide similar descriptions regarding payment of expenses and so on. Along these lines parents might consider annually gifting an interest in the LLC using the annual exclusionary amount under the federal Estate and Gift Tax.. Depending on the arrangement, parents could retain control while gradually transferring ownership to the next generation.
- Inheritance Taxes. One odd provision under Pennsylvania Inheritance Tax laws might be noted here that actually benefits those inheriting property located out of state. Where a vacation property located in another state is owned by a Pennsylvania resident, there is no Pennsylvania inheritance tax due on the property. (Whether there is estate tax due in the other state would need to be explored.) There is no similar benefit for a vacation home located in Pennsylvania. So if your heirs inherit beach property in New Jersey or Maryland there would be no Pennsylvania Inheritance Tax on the property on your death. There would be Pennsylvania Inheritance Tax on a property located in Pennsylvania. It helps to know the differences.
About the Author Janet Colliton
Esquire, Colliton Law Associates, P.C. Janet Colliton has practiced law for over 38 years, 37 of them in Chester County, Pennsylvania, a suburb of Philadelphia. Her practice, Colliton Law Associates, PC, is limited to elder law, Medicaid, including advice, applications and appeals, and other benefits planning including Veterans benefits, life care and special needs planning, guardianships, retirement, and estate planning and administration.