When preparing an estate plan, deciding to put a beloved vacation home into a trust should be a simple matter. It’s one of the best ways to transfer the property to heirs. Leaving your vacation property unprotected by a trust can create headaches for your heirs.
An attorney who specializes in estate planning can explain the trust tools that reduce your exposure to estate taxes and provide your family members with an opportunity to carry on your leisure time traditions. Trusts also limit public knowledge of your family’s wealth and reduce fees associated with probate administration.
Avoiding Taxes, Probate Fees, and Family Disunion Through Trusts
When an Illinois resident owns property in their name (without a joint owner), state law requires it to pass through the probate process upon the owner’s death. If the resident also owns an out-of-state vacation property, a secondary, or ancillary probate process is usually required in that jurisdiction as well. This often results in families paying legal and administrative fees for simultaneous probate actions in two states.
Those who leave property through wills trigger the probate process, and those wills and property records become public record. Trusts allow property to change hands outside of probate.
The Impact of Illinois Estate Taxes
There are a variety of trust tools that can be used to reduce tax exposure. This is important because Illinois has a tax that applies to estates valued at $4 million or more. Unlike many other states, the exemption is not “portable,” meaning it cannot be shared, even between married spouses. In addition, Illinois’s approach to levying estates is called a “cliff tax,” meaning that an estate valued over $4 million triggers taxes on the entire amount, not just the value above the $4 million threshold.
Some trusts allow married couples to preserve the full $8 million estate tax exemption allowed. These include an AB trust, which splits the estate into separate shares upon the first spouse’s death, or a spousal lifetime access trust (SLAT) which allows one spouse to transfer assets irrevocably while the other retains limited access to trust funds.
How a Qualified Personal Residence Trust (QPRT) Works
Vacation homes may be included in Qualified Personal Residence Trusts, allowing the property to pass to your heirs at a discounted value (for real estate taxes) while it is subtracted from the total value of your estate.
This type of trust requires gifting ownership of a home or vacation property to the trust for a specific period of time. During this period, the owner can continue to use the property as they choose. Afterward, the property ownership is transferred to the former owner’s heirs or beneficiaries. If the former owner is still alive, the value of the home is removed from their taxable estate at death; if not, the value of the property is taxed fully.
Because a QPRT is irrevocable, the terms cannot be changed, making it less flexible than some other types of trusts.
Revocable Living Trusts Allow Flexibility and Control
A revocable living trust can eliminate the need for probate and allows the property owner ultimate flexibility, including continued use of the property. Revocable trusts may be amended or withdrawn (revoked) at any time.
Promoting Family Harmony Through Planning
Inheriting vacation homes can cause conflict among heirs. Parents should weigh whether there’s sufficient interest from their children to retain a vacation home, and if so, they can provide funds to maintain it so ownership isn’t a burden. A trust can provide direction for shared use, maintenance responsibilities, and how shares can be sold or transferred by heirs.
Guidance for Navigating Estate Planning Tools
Few people know all of the intricacies of estate planning tools and how they interact to provide the maximum benefit. An experienced attorney from Legacy & Life Law can provide guidance tailored to your situation. A comprehensive estate plan will allow you to enjoy the fruits of your life’s work and know your loved ones will be cared for. Call for a consultation today.