How to leave a vacation home to your children

vacation2You might think it's easy to leave a vacation home to your children in your will. But there are many issues that can arise. For instance, over time children might squabble over whether to sell the property or who will pay for major repairs or renovations, especially if some children use the home more than others. And there are tax, liability and asset protection issues to consider as well.

Here's a look at some of your options:

First, you can sell the home to your children if you reach a point where you no longer want the responsibility of ownership. However, this could result in hefty capital gains taxes.

You can also leave the home in equal shares to your children in your will. But this can lead to disagreements between the children over handling major expenses that come up in connection with the property, particularly if some children are financially better off than others.

In many cases, it's a good idea to leave the home to a trust. This can be smart because you can create rules for the children's use of the property, contributions to maintenance and expenses, etc. Another advantage of a trust is that it can help shield the property from creditors if one child runs into financial difficulties.

Or, you could put the home into a limited-liability company or a limited-liability partnership. This can help limit the children's legal responsibility – for instance, if a child brings a friend to the property and the friend slips and falls and has a serious injury, the child's liability might be limited to the value of the property.

If your children are very enthusiastic about using the home, you might want to place a limit on how much time any one child can spend there. You might want to require that a child give notice, such as two weeks or one month, before using the property, so other children get a fair chance to use it as well. You might even want to specify who gets to use the home at different holidays.

You can also specify what will happen if one child wants to sell his or her share to the others, so as to prevent disputes about the price.

You can also help your children by creating a fund to pay for taxes, insurance and repairs. This fund could be a trust that receives the proceeds of a life insurance policy.

Finally, if you want to reduce your estate and gift taxes, one option is a "Qualified Personal Residence Trust," or QPRT. You give the home to your children, but retain the right to use it for a set term. Although you are making a gift of the home to your children during your lifetime, for tax purposes the value of the gift isn't the full value of the home – it's the value of the home minus the value of your right to live there for whatever the term is. So the amount of taxes that are owed will usually be considerably less.