Estate Planning and the Family Vacation Home, Part 2: Taxes

Last month’s article entitled “Estate Planning and the Family Vacation Home” highlighted important family considerations associated with the transfer of a vacation home. Lawyers can help families deal with complexities and develop a plan that will allow a vacation home to stay in the family for generations to come.

Lawyers can also help clients navigate the complex; frequently changing tax consequences associated with the transfer of a vacation home and, in some cases minimize, the tax burden. Tax consequences associated with a transfer of property depend on whether an individual chooses to transfer property at death or during life.

Individuals who wish to transfer property at death can name recipient(s) by developing an estate plan. An individual’s estate will be subject to estate tax at the forty- percent rate if his or her taxable estate and lifetime gifts exceed 5.43 million dollars. (This amount is subject to change, by law it follows inflation, but is also subject to periodic Congressional action.) A taxpayer friendly provision called “portability” allows spouses to avoid estate tax if cumulative taxable transfers do not jointly exceed 10.86 million dollars, if the proper election is made.

And so, for most of us, this tax is not of concern. Additionally, if an individual transfers property to a spouse, the marital exemption will eliminate estate tax associated with the first spouse’s death. If the surviving spouse has substantial wealth, the deceased spouse’s executor should make a portability election by filing an estate tax return within nine months of the deceased spouse’s death to allow the surviving spouse to utilize the unused portion of the deceased spouse’s 5.43 million dollar gift and estate tax exemption amount. Under current law, if those who inherit sell the property, they are benefitted by a “stepped up basis” to the date of death value and, if sold shortly after death, will have little or no capital gains tax to pay.

Alternatively, an individual may also choose to transfer his or her property during life, by gift. An individual will be subject to gift tax at the forty-percent rate if lifetime gifts exceed the 5.43 million dollar exemption amount. Lifetime gifts reduce the exemption amount available for an individual at death. However, individuals can transfer $14,000 per year, per recipient without “eating into” the 5.43 million dollar exemption amount under a provision known as the annual exclusion. Spouses can jointly transfer $28,000 per year, per recipient without “eating into” the applicable exemption amount. An estate planning lawyer can help you establish a long-term gifting program to transfer a substantial amount of assets out of your estate over time, without reducing the exemption amount available at death.

The tax disadvantage of a gift is that the person to whom the property is given has the basis of the donor. If the recipient sells the property, the entire appreciation from when the donor acquired it, either by purchase or by inheritance, (less the cost of improvements made) is taxable as a capital gain. If the donor in turn was the recipient of a gift, the value of the property is tracked back to the value at the time of the first person who gave the property.
Given the inflation in property values, especially vacation properties in New Hampshire, the capital gain, and therefore the tax, can be significant if the transfer is through a gifting program. Lawyers can help you develop strategies for gifting appreciated property and advise you in how to weigh the capital gains tax consequences associated with the gift versus the other issues surrounding acquiring the property through inheritance.