How to Split the Lake Cabin among the Kids

Senior couple puzzling over documentFinancial Planning’s recent article, “Save clients from tax pitfalls, family strife when passing on that lake cabin,” says that a parents’ well-meaning bequest could wind up destroying family relationships. That’s the exact opposite of what they wanted, when they imagined family reunions at the lake. The issue is that some of the children might want to cash in their share of this valuable asset, and others may not.

Some of the kids may be attached to the family vacation home and want to keep it. If possible, the best solution is a buyout among the siblings. That’s not as simple if finances don’t allow it, and the sentimental siblings are forced to sell, resulting in hard feelings. Another option is to put the vacation home in an irrevocable trust to remove it from the estate.

In addition to a need for cash, one heir may reside too far away to enjoy the home regularly, another heir may have a spouse who doesn’t want to use the vacation home, or another heir may be unmarried without children and has no need for a large vacation home. Family discussions should take place while original vacation homeowners are still alive and healthy, in order to eliminate a great deal of frustration and stress.

Remember, a vacation home sale doesn’t qualify for the $250,000 capital gain exclusion (or $500,000 for married couples filing jointly) that can apply to the sale of a principal residence. A large gain on a vacation home might be taxed at the top 20% rate on long-term capital gains. There’s also the 3.8% surtax on net investment income, as well as the potential for state income tax. But maintaining the vacation home and leaving it to the heirs as an inheritance, doesn’t create an income tax bill because there’s step-up basis to the date of-death value. This wipes out the capital gains tax on prior appreciation.

When the kids are older, family discussions while both parents are alive can help make estate planning decisions that everyone likes. The kids might want to share the house and maintain it. If one child isn’t as financially secure as the other, he may want to inherit cash rather than the property. If that’s honored by the parents, they can state in their estate plan that one child will get the house and the other will get an equivalent value of other assets. The real estate appraisal can take place at the time of death. Frequently, one child purchases the family home from the estate of the parents, and other siblings buy their own vacation home—perhaps with their own inheritance. This makes everyone happy.

Some families will put the vacation home into an irrevocable trust to remove it from their estate.  However, this can result in capital gains issues for the children in the future. They’ll lose the basis step-up. One option to discuss with an attorney is to decant the trust—or move the assets to a new trust with different terms.

Speak with a qualified estate planning attorney to see what options are best for your family situation.

Reference: Financial Planning (May 23, 2017) “Save clients from tax pitfalls, family strife when passing on that lake cabin”




The President’s New Plan for the Middle Class

MiddleTax and economic reforms are on the President’s agenda for 2015 as he seeks to close what he terms “unfair loopholes that are only available to the wealthy and big corporations” (perhaps another inappropriate use of the term “loophole”).

Forbes recently detailed some of the key proposals from the President in its article titled “President's New Tax Proposal Would Hit Wealthy, Benefit Middle Class.”

The highlights include these provisions:

Eliminating stepped up basis. The President says that this is “the single largest capital gains tax loophole.” He proposes to eliminate stepped up basis at death, in which heirs are allowed to use the date of death value of capital assets instead of the decedent’s actual basis for capital gains calculations.

Raising capital gains and dividend rates. In order to spur investment activity, the capital gains and dividends rates have been decreased over the past 30 years. The President’s plan would up those rates to 28% for high-income taxpayers.

A new tax credit for double-income families. The President proposes providing a tax credit of up to $500 for families with two working spouses equal to 5% of the first $10,000 of earnings for the lower-earning spouse in a married couple. The maximum credit would be available to families with incomes up to $120,000, with a partial credit available up to $210,000.

Upping child care tax incentives. The President proposes to increase the child care tax credit, or the dependent care tax credit, to $3,000, but only for middle class families with children under five.

New education tax benefits. Combining some of the existing education tax benefits is part of Obama’s strategy. A move that would conceivably permit more students up to $2,500 in tax breaks each year over five years. The Lifetime Learning Credit and the tuition and fees deduction would be cut and replaced by an expanded American Opportunity Credit (AOC). The refundable part of the AOC would also be increased.

For more information about estate planning, please visit my estate planning website.

Reference: Forbes (January 17, 2015) “President's New Tax Proposal Would Hit Wealthy, Benefit Middle Class”

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