Keeping the vacation home in the family
Summer is here, and for many families that means trips to the family cottage, camp or farm – a place where your family has enjoyed countless hours of fun and recreation over the years.
Whether modest or grand, these family vacation properties usually have special sentimental value as a place to share common experiences and foster family traditions. As they enjoy their time with the family this summer, many will assume that their children, grandchildren and great-grandchildren will also enjoy such that special place. But without proper planning, that might not be the case.A trust, which we call a “family compound trust,” affords the most flexible method for owning, managing and transferring unique family properties.A well-drafted trust has several advantages. Under New Hampshire law, trusts can last in perpetuity. They can restrict ownership of the property to members of the family, thereby protecting the legacy property from creditors and unhappy marriages. It will provide a management structure for an orderly decision-making process, including formulating annual budgets, calculating assessments and providing penalties for non-payment of assessments.Typically, the beneficial interests in the family compound trust are divided into classes representing the separate family groups, with each family group owning certificates of beneficial interest, or CBIs, which are similar to shares of stock in a corporation. It is the CBIs that are transferred from parent to child to effectuate estate-planning goals.Tax, other benefitsLegacy property often represents a significant value in an individual’s gross estate, and if it is lakefront property it may well appreciate at a greater rate than other assets. By creating a family compound trust that holds CBIs, the grantor (the person who creates the trust) can reduce his or her taxable estate in a number of ways.One option is to take advantage of the annual gift tax exclusion amount (currently $13,000 per individual or $26,000 per couple) and give away beneficial interests (CBIs) to the children each year, thereby slowly reducing the value of the grantor’s taxable estate.Another option is to give away all of the CBIs upon creation of the trust, thus using up all or a portion of the grantor’s lifetime gift tax exclusion (currently $5 million), but avoiding the future appreciation of the legacy property in the estate.
With the current depressed real estate market, properties are appraising for much less than they did in past years, and property owners are able to use less of their lifetime gift tax exclusion to give away interests in legacy property.Other reasons to create a structure such as a family compound trust to own and manage legacy property:• By establishing a written structure, the grantor can make sure the property stays in the family by providing restrictions on the transfer and assignment of CBIs. Generally, the trust will not provide restrictions on transfers of CBIs to the descendants of the grantor. It will, however, prohibit the sale of CBIs to outside parties.• Perhaps one of the most compelling reasons that a family compound trust is created is to ensure that future generations enjoy the property in the same manner that previous generations did. When more than one family owns property, disagreements as to its use, maintenance and transfer may arise. The family compound trust is designed to prevent, or at least minimize, such disagreements by addressing the issues clearly in the trust document.• Typically, each CBI holder is responsible for his proportionate share of the expenses relating to the upkeep and maintenance of the property based on his ownership interest. If it is anticipated that there will be a wide variation in the use of the property by different CBI holders, the trust can provide for unequal assessments to address the inequality of use. For instance, the trust might provide that capital improvements are paid proportionately based on ownership, but ordinary expenses are divided based on usage. The grantor also may wish to provide for an endowment for future expenses. How to structure the trust document as to uses and expenses is ultimately decided on a case-by-case basis, but the advantages of tackling these issues ahead of time are endless.• It is important to appoint trustees (and successor trustees) who will manage and conserve the trust property, prepare annual operating and capital budgets, determine assessments and generally serve the best interests of the CBI holders. Any issues relating to the use and management of the property that were not addressed in the trust document can be delegated to the trustees, who have the power to adopt rules and regulations for the everyday use of the property in the future. nhbrDoria D. Aronson, an attorney in the Trusts and Estates Department of McLane, Graf, Raulerson & Middleton, can be reached at firstname.lastname@example.org. Alexandra Breed, a director in the practice, can be reached at email@example.com.