How can you pass your beloved cabin to your heirs at the least risk and cost? Below is a brief overview of a few popular strategies for keeping the cabin in the family while protecting your assets, minimizing tax liability and avoiding family disharmony.
Revocable Trust (Living Trust) – A revocable trust, sometimes known as a living trust, allows senior generations to maintain control over the management of the cabin during their lifetime while retaining the right to revoke or amend trust terms. The person establishing the trust is known as the “settlor” or “grantor” and the trust assets are managed by the “trustee” (the settlor may serve as trustee). The trustee has a fiduciary responsibility to manage the trust’s assets for the economic benefit of all beneficiaries. Living trusts allow assets to be transferred to heirs without passing through probate – the court-supervised administration of a decedent’s estate – thus avoiding the expense and delay associated with the probate process.
Qualified Personal Residence Trust (QPRT) – A QPRT permits a cabin owner to gift his/her cabin to an irrevocable trust for the benefit of his/her heirs, while reserving the right to reside in the cabin rent-free for a set term of years. At the end of the term, the cabin is transferred to the remainder beneficiaries (i.e., the heirs, or a trust created for the benefits of the heirs). This structure may reduce gift taxes because the value of the gift to the heirs is discounted to take into account the cabin owner’s use of the property during the trust term.
Family Limited Liability Company (FLLC) – A family limited liability company is a business entity formed among family members for the purpose of ownership and management of the cabin. Control over the FLLC’s assets can be vested in all members or in one or more managers. An FLLC is a flexible tool that offers certain tax benefits and protection from creditors. It also permits the amendment of governing documents (sometimes known as an operating agreement) and the restriction of ownership to certain family members. It may also allow a perpetual existence, depending on state law. FLLCs must be operated as a business under the requirements of state law, including maintaining accurate business records and complying with the operating agreement. Planning the transfer of your cabin to family members is not a simple matter. It is important to consult with an attorney and/or accountant regarding the legal and tax implications of any disposition of property.