When we die, we can’t take anything with us. All or our worldly possessions are left behind. Unfortunately, we can’t just leave behind whatever we want to whomever we want. The government has stepped in and created an estate tax system. If your net worth is over a certain amount, the government is going to take a hefty chunk of your belongings before your heirs can receive it. So, is there a way to pass on your vacation home while avoiding estate tax?
Set Up a Trust
One of the best ways to shield a vacation property from estate taxes is through a trust. You can create a trust for your children and transfer the property to the trust. There are many different types of trusts that you can form. One of the best ones is a qualified personal residence trust. This allows you to continue to live in the residence until the trust expires. When the trust does expire, the home will be transferred to your children. If you wish to continue living there, you will need to pay rent to your children.
Transfer to an LLC
An LLC is another way to reduce estate taxes. By transferring your vacation home to an LLC you reduce the worth of your estate, which will lower the taxes on it. The vacation home itself is protected because it is no longer a part of the estate. You can make your dependents the fiduciary beneficiaries of the LLC while maintaining control of the property. You do this by giving them financial shares in the property but retaining the management position. Establishing an LLC also has other benefits aside from reducing taxes. You can use the LLC to protect yourself in the case of a lawsuit that involves the vacation home.
You can give up to a certain amount of money away each year while still avoiding the gift tax. Unfortunately, the worth of your vacation home will be far above this limit. However, over the years, you can give your beneficiaries enough money that they can purchase the home. This will allow you to give the vacation home to them. It will be important that you keep careful records of these transactions in order to prove them for tax purposes.
Tax law can be a little tricky to understand and get right. If you get it wrong, the results can be disastrous. Before you commit yourself to a course of action, consult with a professional tax advisor. Make sure that you dot your i’s and cross the t’s on all your paperwork so that it is done correctly.
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