Vacation Homes and Second Properties
An individual or family may be truly fortunate in life to acquire a vacation home such as a cottage on the lake or a cabin in the mountains to use and enjoy. However, such a luxury may create unique estate planning issues for the owner to consider:
Who is on the title of the second home?
Do you intend to hold the title in your name? Is it a family vacation home that may be owned by several people? If it is for the benefit of the family, do you intend to make it available for specific purposes?
An estate planning attorney can help you decide how to appropriately title your second home depending on the circumstances. Perhaps if it is a home owned with your spouse, then maybe it should be titled to both of you as joint tenants with rights of survivorship so it passes to the surviving spouse upon the death of the other. If several individuals or family members are to own the home, then they may be “tenants in common” meaning that each individual owns a percentage interest in the property and could only sell or inherit a particular percentage. In other words, if a tenant in common dies, his or her heir only inherits the percentage interest in the property that the decedent had.
Another title option could be to draft a Ladybird Deed that creates a life estate for the grantor during his or her lifetime with the power to sell and mortgage but automatically transfers the property to a named grantee upon the grantor’s death. This is a powerful tool in that the property avoids having to go through probate should the owner die. However, a significant drawback could be in relation to the owner’s Medicaid considerations. The Ladybird deed is frequently a tool for persons looking to be eligible for Medicaid and avoid potential Medicaid estate recovery in Michigan (by avoiding probate), but second properties are still counted for the purpose of income if it is not the “homestead property” so the grantor may not qualify if the threshold is too high.
Another option that may be appropriate under the circumstances to put the second home in a revocable family trust that specifies the conditions that the home may be used by the beneficiaries and such terms and conditions can be passed down through the generations as it is managed by a line of successor trustees. As long as the property is owned by the trust and the trust is not dissolved, then the property can avoid legal proceedings such as probate.
Yet another option would be to place the second home under the ownership of a business structure such as a partnership, limited liability company or corporation. The use and administration of the home would be subject to the company’s by-laws or operating agreement and older generations of owners can transfer their “shares” to younger generations without having to change titles or undergo probate. These transfers can still be subject to estate taxes and gift taxes depending on the jurisdiction of the second home.
Finally, another consideration may be to place the second home in a qualified personal residence trust, or “QPRT”. A qualified personal residence trust is a irrevocable trust in which the second home is transferred to and allows you the right to use the home for a term of years and then passes to beneficiaries after a term of years or by the terms of the trust. This device can, under the correct circumstances, be a fantastic tool to help reduce or eliminate estate taxes or gift taxes but has the significant drawback of being irretrievable should the grantor change his mind about this irrevocable trust.
The best choice will ultimately depend on how well the decision conforms to your wishes and how well the decision shields you from significant consequences.
What if my second home is in another state or another country?
If a decedent passed away with his primary residence in one state, but his second home was in another, then the heirs may have to conduct a probate proceeding in two different states to manage all of the property in the estate. This can be costly and time-consuming. Depending on the laws of the second state that the other property was located, there may be steep administration or inventory fees pursuant to an ancillary probate.
Placing the second home in a trust can help to avoid probate in the second state. Be warned that, depending on the laws of that state, the second property may still be subject to estate taxes, gift taxes or generation-skipping taxes even if said property avoids the probate process.
If the second home is in another country, then its administration will be subject to local laws and regulations that can be drastically different than what could be expected in the United States. Even worse, the second home is subject to U.S. estate taxes if you are a U.S. citizen or resident AND it can be subject to taxation in the country that the second home is located. Proper analysis of local laws and considerations to estate planning should be undertaken before making such a significant purchase in a foreign nation.
What if I rent my second home to others?
Although renting out your second home to paying tenants can be a lucrative source of income, there is the ever present danger of personal liability should the tenant become injured on your property. To reduce personal liability, it is worth considering the formation of a business entity that can shield your personal assets from a damaging lawsuit. Each business structure has its benefits and drawbacks, and your estate planning attorney can help you decide which is best for you. These structures include:
1. Sole Proprietorship
2. Partnership
3. Corporation
Call our office today for a low-cost no obligation consultation to help you determine what options are best for you.
