Estate Planning Implications of Buying a Second Home

Whether you are considering a place to relax or making a real estate investment, buying a second home often fulfills a long-term goal and feels like a huge accomplishment. The estate planning attorneys of BRMM can provide the guidance you need to ensure the accomplishment meets all of your expectations.

Reasons for Purchasing Second Home

Your reason for buying an additional home may impact several decisions about choosing the new property. Will the home be for recreation and enjoyment or is an investment the primary goal?

If building a bigger nest egg is your goal, you will want to analyze market conditions. Because vacation property is usually located in geographically desirable areas, it is likely that a property will maintain its value. Yet, like any real estate, the market fluctuates and no one can promise a return on the investment.

One of the primary financial considerations is whether or not you plan to rent out the property during the time you are not using the space. There are tax implications to consider. If you do not rent the property for more than two weeks per year, interest on the mortgage and the property taxes are deductible, similar to a primary residence. The value of the rental income may counter-balance the tax consequences, but sound planning is necessary to ensure you get the best result.

Another major consideration about renting a second property is personal liability in case of a mishap. Proper insurance is the first line of defense. Yet, if a renter has an accident or injury on the property and chooses to bring a claim, you may want to ensure that your personal assets are protected. One way to provide protection is to title the property wisely.

How to Title the Property

Even before you sign all the paperwork for your new property, you will need to consider how to hold the title. There a wide variety of ways to hold title – an individual may hold title solely in their own name, title can be held jointly between two or more people, a company could be created to hold title, or property can be held in a trust.

If you are renting a property and want to protect personal assets from liability, creating a limited liability company (LLC) or some other business entity may provide the best result. If a renter brought a successful claim and the property was held in a business entity, your personal assets and primary residence should be protected from claims against the rental property.

For married people who buy property together, default title is “joint ownership with survivorship rights” under most state laws. Survivorship means when the first spouse passes away, the property is not subject to probate proceedings, instead the property immediately and automatically passes to the survivor. Although this arrangement has benefits, there can be at least one disadvantage. The surviving spouse may not be able to take advantage of estate tax exemptions.

For other joint title holders, the relationship between the co-owners can have estate planning and tax implications. If the proportionate share of ownership is not based on the resources that each co-owner contributed, gift tax consideration may be implicated. Additionally, co-owners will want to analyze whether they can take advantage of federal or state estate tax exemption amounts.

How you hold title can be especially important if you are buying property outside your home or domiciliary state. If you own property in another ancillary state at the time of your death, your heirs or probate representative may be required to complete a probate proceeding and pay estate tax in the second state.

If you are considering a home in another country, the implications can be even more consequential. The laws of some countries mandate that a surviving spouse and children inherit it in set percentages under “forced heirship” and some countries do not recognize trusts. United States citizens or residents are subject to U.S. estate tax on all their worldwide assets. The country in which the home is located may also impose inheritance or estate taxes, but there are some treaties that prohibit double taxation. An attorney can help with the estate planning issues around owning a second home in another state or a foreign nation.

Gifts of Vacation Property

Many people dream of being able to pass a beloved cabin or beach house to a loved one in the future. The gift tax issues surrounding this type of situation are complex. You may find that a trust or LLC provides the right fit for your situation, but the situation should be discussed with a qualified estate planning professional.

Ensuring Future Generations Can Enjoy the Property

As families grow, there is natural expansion of geography and relationships. A vacation property may provide a special place where loved ones can still come together and share memories. For those that would like to ensure future generations can enjoy their second home, an LLC with a very detailed operating agreement may provide the best result. Another option might be a trust with an endowment to fund the taxes and maintenance required on the property.

Whatever your goals for a second home, BRMM attorneys can help ensure your estate plan makes the experience fulfilling and enjoyable. Contact our Michigan law office today at(248) 213-9514 for a free, confidential consultation.

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