Estate Planning for Lakeshore Property -
"Passing on the Fun to the Next Generation", by Brigitt Orfield
As published in the March 22, 2002 issue of Outdoor News
When your family is "up at the lake" enjoying the summer sun or gathering for the annual fishing or snowmobiling trip, the last thing on your mind will be estate planning issues concerning your ownership of lakeshore property. Heck, who wants to think about dying when the walleyes are biting? Such planning may be necessary, however, to protect these bastions of fun for future generations.
Lakeshore property owners should consider these important issues.
Passing it On.
Like many lakeshore property owners, you may have a clear idea who you would like to inherit your property. You probably envision your children and grandchildren enjoying the property for years to come. To make sure your property "stays in the family," you need to have your property properly titled and you need a plan for passing the property to your desired heirs. Without a proper plan in place, unforseen circumstances could affect the future ownership of the property.
Title of property. The current ownership of the property will in part determine who receives it in the future and how much control you have over its disposition.
Most married couples own property as joint tenants. Property held with another as "joint tenants with rights of survivorship" does not require probate and will pass automatically to the surviving joint tenant. Owning property in joint tenancy is very common, but can cause an unintended result- as in the case of a second marriage- if you do not want the entire property to automatically pass to the second spouse upon your death.
If you are the sole owner, the property will be probated upon your death and pass under the terms of your will, or if you do not have a will, under the state's intestacy laws (i.e., statutes that determine "who gets what").
Property also can be held by trusts or family holding companies- such as a family limited partnership- and will pass according to the terms of the trust agreement or the governing documents of the family holding company.
Methods of transferring property. Depending upon the particular form of title ownership, there are different ways to transfer your lakeshore property to your heirs -- some transfers occur before you die, some occur after you die.
If you want to pass the property to your heirs without any restrictions on its future use or transfer, there are several available options. The property may be transferred during your lifetime through the use of a simple quit claim deed. Alternatively, you can convey the property but also reserve to yourself a "life estate." This transfer gives you the right to use and enjoy the property during your lifetime. Property also may be transferred outright at death through the provisions of a will or trust.
If you want to set up a mechanism to control the future use or transfer of the property, or protect it from the creditors of your heirs, it may make more sense to transfer the property through the use of a trust or a family holding company. These options provide more flexibility in terms of control and use and can also provide liability protection in certain circumstances. The downside is that these arrangements are more expensive to set up and require ongoing maintenance.
Estate tax issues. Under the current tax law, you can protect up to $1 million in assets from federal gift and estate tax. In addition, you can make unlimited gifts to a spouse or charity, and under the "gift tax annual exclusion," may gift up to $11,000 per year per person ($22,000 per year for a married couple who elects to split gifts on a federal gift tax return) to as many people as you desire.
If you have a large estate, you may wish to make lifetime gifts of the property to your heirs using the gift tax annual exclusion to remove the value of the property, and any associated future appreciation, from your estate. This can be done in several ways.
Outright gifts can be made by deeding partial interests in the property (valued at $11,000 or less) to each of your desired heirs. More restricted gifts can be made to a trust in which your heirs are the beneficiaries. However, these trusts must contain certain withdrawal powers in order to qualify the gifts for the gift tax annual exclusion.
Annual exclusion gifts also can be made through the use of a family holding company, such as a family limited partnership. For example, in this scenario, you and your spouse transfer your lakeshore property to a limited partnership in which both of you are the general and limited partners. You then transfer limited partnership interests (valued at $11,000 or less) to each of your children and/or grandchildren. You and your spouse, as general partners, maintain control of the lakeshore property even though limited partnership interests have been transferred.
In many instances, you may be able to make gifts of the limited partnership interests at a discounted value for federal gift tax purposes, since the limited partners do not "control" the partnership and the limited partnership interests are not freely marketable.
Medicaid and Medical Assistance. Long-term medical care and nursing home costs can quickly diminish the assets of the elderly. Federal Medicaid and state Medical Assistance programs exist to assist individuals in covering these costs. However, in order to qualify for these benefits, you must meet the eligibility requirements, including asset limitations. Current rules allow you to qualify if assets were transferred to your heirs at least three years prior to your initial application for benefits (five years in the case of transfers to or from a trust). If qualification for these benefits is something that may be of concern to you in the future, you may wish to consider gifting your lakeshore property to your heirs before it becomes an issue.
Ancillary Probate. Many of you may own lakeshore property in another state. If you die owning this property in your individual name, the property will have to be probated in the state where it is located ("ancillary probate"). To avoid the burden of an additional probate, the property can be held with another as joint tenants with rights of survivorship or in either a revocable or irrevocable trust.
Multiple Ownership Agreements. Whether you decide to transfer your lakeshore property to your heirs today or take measures to put a plan into place for the future, it's best to have a multiple ownership agreement in place to govern the joint ownership of the property. This type of agreement can, among other things, protect against personal liability, outline guidelines concerning property decisions and help to ensure that the lakeshore property provides "fun" for the next generation instead of acting as a catalyst for disagreements.
