Does your family own a meaningful real estate asset that you’d like to keep in the family? Maybe it’s a childhood home, lake or beach house, vacation home, or ranch. Places like that hold special memories. Gathering there can provide powerful family glue for kids and grandkids. Passing down legacy real estate to future generations requires special planning, or else the hoped for “glue” causes a family to become “unglued.”
At The Blum Firm, we work with many families who own real estate that is precious to them. For example, we’re working now with a family of college football fans who owns a “game day house” near their team’s stadium. Since Laurie and I raised a son who is also a passionate football fan (or should I say “fanatic”), I understand the passion associated with that property. In their eyes, it’s not just a “house.”
While the matriarch and patriarch are alive, they foot the bill to cover operating costs such as taxes, insurance, utilities, housekeeping, lawn care, maintenance and repairs. Mom and dad also establish the rules for shared use, including overseeing the calendar for who gets to use it and when. But who steps into that role when parents are gone and the home is co-owned by siblings, and further down the road when it’s owned by cousins?
Hayley Cuccinello grapples with these issues in her article, “Who Gets the Hamptons House? How Rich Americans Give Homes to Their Children Without Causing Feuds,” (Business Insider, August 13, 2024). She quotes Adam Ludman, head of tax advisory at J.P. Morgan Private Bank: “‘You have to start by recognizing that the family home or the vacation home is more than a financial asset. It is deeply personal.’” Cuccinello elaborates: “Even among rich heirs, passing on real estate without proper planning can lead to sibling strife. Who gets the Hamptons house for July 4? What if one sibling wants to renovate the Aspen chalet and the others don’t want to split the cost?”
We recommend a multi-step solution:
- Transfer the real estate to an entity (such as an LLC) to limit liability exposure. If someone’s injured there, you want to insulate your other assets from being reachable.
- Consult with an insurance professional for optimum coverage.
- Create an LLC Operating Agreement to cover the rules for shared use.
- Transfer the LLC interests to a FAST trust (Family Advancement Sustainability Trust) to remove the real estate from your estate, avoiding a 40% estate tax at death. With the lifetime exemption at almost $14 million ($28 million for a couple), now is the ideal time to make that transfer, locking in the doubled exemption before it sunsets in half at midnight on December 31, 2025.
- Provide a governance structure in the FAST to insure selection of LLC managers who will honor the founders’ intent.
- Fund the FAST with assets that generate a sufficient cash flow to cover the ongoing cost of operations. In many cases, the ideal solution is a life insurance policy on the parents, with proceeds payable at their death to the FAST.
- Build in flexibility into the FAST and LLC agreements, so the plan is not set in stone. As Ludman cautions, “‘Families obviously evolve and expand, and circumstances can change.’”
Every family has unique considerations. This isn’t a one-size-fits-all situation. The Blum Firm would be honored to help you tailor a solution for your legacy real estate that matches the needs of your family.