Cabinitis: The State of My Estate
How I plan to keep the cabin in the family
June 1, 2006
Many years ago a friend of mine told me that one of the most bitter memories of his childhood was the day his father announced to the family that, unbeknownst to any of them, he had sold the family cabin. Thirty years later my friend still remembered the incident vividly.
Photo by Douglas Dickens, dreamstime.com
I’ve had several attorneys tell me that one of the most acrimonious issues splintering families is the disposition of the family cabin. In many cases, there are more arguments about the cabin than about anything else.
Take heed. I have spent a great deal of time and money trying to make certain that there will be no bitter arguments in my family. And yet, I am not certain that I have done everything perfectly. It takes a great deal of thought to try to ensure that all participants in the estate will be satisfied with the decision. And to make sure Uncle Sam doesn’t take too big a bite out of the estate.
We would all do well to regard taxes as one of the immutable laws of the universe and plan accordingly.
If your total estate is somewhat sizable (and bear in mind that inflation and appreciation probably have made your vacation home much more valuable than you realize), you should consult with an attorney and find some way to place the cabin into a trust mechanism that will pass the property on to the heirs with reduced tax consequences to them and the donor. There are vehicles that can accomplish this and that is why a good, knowledgeable estate-planning attorney is vital.
My plan. The trust I have chosen is called a Qualified Personal Residence Trust, commonly called a QPRT (pronounced Q-PERT). What a QPRT essentially does is set aside a period of time (usually 10 or 15 years) during which the ownership of that property gradually passes to the ultimate heirs. The trust is irrevocable, meaning that once chosen it cannot be cancelled.
The tricky part here is that both donor partners must survive for the span of time chosen. In short, you’re gambling that you are both going to outlive the duration of the trust to achieve the full benefits of reduced estate and gift taxes if the property stays in the family. If it is sold during those 10-15 years, bear in mind there will be tax consequences to the sale. If only one partner survives that time period, that share will incur half the benefit of passing along the property, but the other half’s benefits will be lost.
The property must first be appraised to determine a discounted value of the property at the time of passage to the heirs. The reduction in value is based on the fact that at the end of that chosen time period, the property reverts fully to the new heirs; and the original donors, if still alive, must actually pay rent to the heirs if they utilize the property after that.
So the process does represent a significant roll of the dice. If all works out, however, everyone comes out fairly well and the property will pass to the new owners. The property is then theirs to use.
Get expert advice. I do not pretend to be an investment adviser or an estate planner. This thumbnail sketch partially describes one method of keeping a cabin in the family. It is not the only one. A good professional adviser in this area is required.
In fact, my primary piece of advice is to find the best estate-planning attorney available in your area. Ask your friends or fellow cabin owners for recommendations.
This is a serious matter for many families. Many dollars and many hurt feelings could lie in the outcome.
All I am suggesting is that you give it some careful thought, try to get some good professional advice and make your decision accordingly. I always tell people that no decision is a decision. This is a case where no decision may turn out to be a poor decision.
Lars F. has refused the 12-step plan to control his cabinitis. Only his first name is used to protect his identity.
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