Splitting the Lake Cabin Among the Kids

A parents’ well-meaning bequest could wind up destroying family relationships.

By giving a gift of the family cabin, mom and dad see years of their children enjoying family reunions at the lake but the reality may be quite different. 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”

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