Second Homes and Estate Plans: What You Need to Think About

The cabin, the cottage, the lake house, the ski place, the rental property…whatever you call it, a recreational home and/or income property can be a huge blessing to multiple generations of a family. But when it comes to ensuring it’s passed down, and cared for, in an estate, a lot of questions can come up. Here are some ideas of how to handle a vacation home wisely.

The first big question you should ask is whether the home should remain in your family indefinitely. And before you make any assumptions, ask your kids/heirs what they think!

A home is a huge responsibility, both in terms of time and money. Even if your kids love having a second home in the family, and enjoy their time there each year, it’s a completely different question to ask whether they would want to take on the care and upkeep of that property themselves. And one child might have a completely different answer than another. Depending on your decision, here are three courses of action:

Option 1: Keep the Home in the Family & Ensure its Upkeep

First of all, you may consider gifting the home, or partial ownership of the home, to heir(s) during your lifetime. There are many ways to handle this. You could gift it to one child and add stipulations for how upkeep should be handled, and how other heirs may access the home. You may need to even up the estate by gifting other assets to the remaining heirs, or grant seasonal use of the home to those heirs, within reason. You could gift the home outright to multiple heirs with shared responsibility for it, with some parameters in place for decision-making. Both scenarios might be good options, especially later in your life, because they’ll simplify your estate and put some of the responsibility for the home onto your heirs. Both will depend a lot on the financial situation, distance from the home, and responsibility of your heirs.

It may also be advisable to put the property into an irrevocable family trust. This also takes the property out of your estate and puts it into a separate entity, a trust, which could have several beneficiaries and specific provisions. This takes some time and legal fees to set up, but is private (avoids probate) and may help you avoid the 5-year Medicare “look-back” in case you end up in long-term care. Just like a trust protects the home from equity garnishment in case of unexpected long-term care expenses, you can also set up the trust to avoid getting caught up in any one heir’s finances. You can do this by naming heirs “tenants by entirety.” In the case that one heir wants to give up his or her share in the home, he or she would not be able to “sell” that share to the remaining heirs or take out the equity to settle a debt, etc. This prevents an undue financial burden on remaining heirs to try to keep the home in the family, and honors the original intent of the gift. 

In any of these scenarios, you’ll want to consider how upkeep will be handled and paid for long-term. In my family, my siblings and I inherited my parent’s lake cabin while they were still around. It’s in a shared trust, and it has a separate bank account and a contractual agreement for how we’re all to use and care for the property. Each of us pays monthly “dues” to the account, which is like a Home Owners’ Association, of sorts, and can be drawn upon for agreed-upon maintenance and improvements. We each get a set amount of time to use the cabin each year, we keep track of it all on a calendar we all have access to, and if any of us miss our “dues,” we forgo our vacation time there until we’re current. This works for our family, but might not work for everyone. Just be sure that there are provisions set up for who is to manage and fund the care of the home.

Option 2: Gift the Home to a Charity

If your heirs don’t want the home, but you don’t want to keep it long-term, you could pay significant capital gain taxes when you sell the property, particularly if you’ve owned it for a long time and the value has increased substantially. One amazing option could be to gift the property outright to a charitable organization. You’ll want to run this idea past the organization first to ensure they can accept and manage this type of gift, but the organization could liquidate the property and utilize the funds for its mission or, if it fits the vision of the organization, even utilize the property for its own programming. 

If the organization opts to sell the home within a year and a day, this is called a short-term capital asset, and you’d receive the lesser of 1) the home’s fair market value or 2) your cost basis in the asset, up to 50% of your Adjusted Gross Income (AGI) for the year. 

If the organization keeps the property for more than a year, it’s called a gift of a “long-term capital asset,” and you’ll get a charitable tax deduction for the fair market value of the property up to 30% of your Adjusted Gross Income (AGI) for the year, with remaining deductions eligible to be carried forward for an additional five years.

There are also ways to gift partial interest in the property and receive a tax deduction in return. Let us know if you’d like to discuss these options!

Option 3: Charitable Remainder Unitrust Creates Family Income and Future Charitable Gift 

Another option, if you’d like to gift the home, but want more flexibility in terms of access to the funds and where the dollars are given, would be to fund a Charitable Remainder Unitrust (CRUT) with the property. This can be done at any time during your life and if you no longer want the property, at which point the home is gifted into the trust and the managing foundation would liquidate the home. You’d receive an immediate charitable tax deduction for the full appreciated value of the home, you could receive income from the trust for the rest of your life, your heir(s) could receive income for up to 20 years, and then the “remainder” would go to charity at the tail end of the term.

You can also choose to fund a Charitable Remainder Unitrust (CRUT) with the property at your death. In this scenario, the trust would become the beneficiary of the property, your heir(s) would receive income from the trust for up to 20 years, and at the end of the term, the remaining funds would go to the charitable organization(s) of your choice. This can be a win-win-win, because your family will get to enjoy the home during your lifetime, your heir(s) will receive income over time (instead of a lump sum inheritance, which can be hard to manage and triggers greater income tax), and charity will benefit in a major way.

There are so many great ways to ensure that your second home is handled in a strategic way that honors your family’s wishes and helps celebrate the causes you love.


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