How Estate Plans Minimize Risk to a Vacation Property

Our Brooklyn Estate Planning Lawyers Explain How to Protect a Second Home or Property for Another Generation

For many families, a vacation property is a happy place that allows for an escape from routine, a retreat from work, and an opportunity to spend time with the people who matter most. Even if you haven’t already included a second home in your estate plan, you may already have an idea of how you’d like to pass it on to the next generation.

The skilled estate planning attorneys at Landskind & Ricaforte Law Group, P.C. discuss how to fit a vacation home into your New York City estate plan and protect that property for those you plan to pass it on to. 

How to Include a Vacation Home in Your NY Estate Plan

Your vacation home might have great sentimental value, and you may want to leave it to your family’s next generation. But to do so, you need to ensure its safety before, during, and after succession. Here’s what you need to consider when putting it in your estate plan:

The Location of Your Vacation Home

The location of your vacation home makes a big difference in the overall structure of your estate plan. If your property is in another state, you’ll have to account for that state’s laws when writing your will or structuring your trust.

How State Law Affects Probate and Succession

Every state has its own taxation policies and its own rules for succession. New York, for instance, is one of several states that has its own estate tax. If you’re a resident, your estate may be liable even if your property is located elsewhere. 

Your Need for a Competent Executor

Your estate executor or personal representative needs to be able to initiate probate and oversee proceedings. This sometimes requires frequent travel, which can be problematic for people who don’t have friends, family, or a Brooklyn estate planning lawyer.

5 Big Questions That Could Affect How You Handle Vacation Property

1. Do Your Heirs Want the Property?

You may have a sentimental attachment to your second home, but there’s always a chance that your children don’t feel the same way and don’t want the vacation property as an inheritance.

2. Who’s Going to Pay for Upkeep and Maintenance?

If your heirs don’t live in the same state as your vacation home, they may not have the time, the means, or the resources to provide for its maintenance.

3. How Will You Handle a Vacation Property Transfer?

Transferring any type of real property can be difficult, and vacation homes are no different. Even though you could simply list your heirs as joint owners, unexpected life events could give rise to confusion. A divorce, for instance, could leave one of your children unable to retain their share in the home.

4. Do You Have Estate Tax Considerations?

Every New York family whose net worth approaches the state and federal estate tax threshold needs to prepare for the possibility that their legacy could be subject to a very high rate of taxation. In some cases, removing your vacation home from your estate—by transferring it to a trust or managing it through a family-owned limited liability corporation—could help drive down the value of your taxable estate.

5. Are You Willing to Risk Your Vacation Home in Probate?

If you own more than one home, you probably need more than a simple will to safeguard your estate and its interests. In the absence of a trust or similar strategy, your vacation property will be subject to probate. And in probate, disgruntled heirs and profit-oriented creditors have ample opportunity to disrupt proceedings, potentially putting your vacation home at risk.

Configuring the Right Estate Planning Strategy for Your Second Home

If you don’t want your second home to face every risk inherent to probate, you’ll need to configure a strategy that makes sense for your family and for your finances. Although every estate plan is different, some of the most common ways to protect vacation properties include the following: 

Setting up an LLC

A limited liability company (LLC) can help families retain control of a vacation property while maximizing returns on rental income. You can use an LLC to immediately divide interest in a home between members of your family or gradually transfer shares to heirs until you’ve reached your annual gift tax exclusion.

Establishing an LLC also gives you an opportunity to structure an operating agreement, which can be used to configure dispute-resolution processes and set conditions on the property’s use and general management.

Establishing Your Own Trust

A trust is an estate planning tool that lets you decide how assets should be used now and in the future. Different types of trusts serve very different purposes, but most provide benefits such as:

• Being able to set conditions on your heirs’ inheritances
• Enforcing a separation between your estate assets and your trust assets
• Appointing a successor trustee to ensure that trust assets are managed responsibly and used for their intended purposes

Trusts can be broadly categorized as either “revocable” trusts or “irrevocable trusts.”

Revocable trusts let you retain access to trust assets for the remainder of your lifetime. You can also change or amend their terms at almost any time. Irrevocable trusts, in contrast, are much less flexible but act as an exceptionally strong counterweight to creditor claims and tax assessments.

Mitigating Taxes

Most families will never have to worry about estate taxes, but those with higher net worths must consider the possibility that their heirs could lose part of their inheritances to the State of New York and the Internal Revenue Service.

Your best options for minimizing taxation are dependent on your circumstances. They could include setting up an LLC, establishing an irrevocable trust, or exploring the benefits of a QPRT.