Preserving the Family Retreat: Top 10 Planning Strategies

Leading trusts and estates planning firm McManus & Associates shares important tactics via free conference call recording

Top AV-rated attorney John O. McManus discusses real estate transfer in light of 2012's $5MM exemption opportunity

Aug 09, 2012, 09:00 ET from McManus & Associates

NEW YORK, Aug. 9, 2012 /PRNewswire/ -- This year presents a unique opportunity to take advantage of the $5,000,000 exemption – expiring on December 31, 2012 – to move businesses, private equity ownership, stock portfolios, cash and real estate out of one's name and into trust for the benefit of loved ones. Providing guidance on how to leverage 2012's increased flexibility to transfer real estate, John O. McManus – top AV-rated trusts & estates attorney and founding principal of Tri-State-Area-based McManus & Associates – today released the report "Preserving the Family Retreat: Top 10 Planning Strategies."

During a recent conference call with clients, McManus addressed the advantages and disadvantages of choosing one's second residence as a funding source for the $5,000,000 exemption ($10,000,000 between husband and wife). Additionally, based on more than two decades of experience working with prosperous and successful clients across generations, he shares expert guidance on the longstanding strategies to transfer real estate in a tax-efficient manner.

LISTEN – Conference Call: "Preserving the Family Retreat: Top 10 Planning Strategies"

"For many, a second residence serves as a place of rich memories, a place for the family to still gather, and a place you hope your children and grandchildren will continue to enjoy," said McManus. "By putting this asset into trust, you will have created greater assurances that this home or a successor home will remain in the family for many years."

McManus continued, "Strictly from a financial standpoint, is real estate the best asset to transfer? In some instances, the optimal discounted value may not be attainable – but since real estate is often discounted organically due to market forces, it may present the best financial and emotional option."

Preserving the Family Retreat: Top 10 Planning Strategies

1.     What protections does "joint tenants with rights of survivorship" – the typical ownership between husband and wife – afford?

  • Property passes by operation of law ("automatically") to a surviving spouse, avoiding the probate process.
  • If there is a financial reversal of one spouse, joint tenancy helps to protect the property from creditors.
  • When one spouse passes away, tax benefits can be achieved by filing estate tax returns.

2.     When planning with LLCs, what are the strategies for anonymity and tax planning?

  • Transfer of ownership of the second residence to an LLC, or into two LLCs:
    • Either one spouse owns the LLC or two LLCs can be set up with husband owning one and wife owning one.
    • Having the property in only one spouse's name avoids the need to file tax returns every year.
  • If there is an accident on the property, only the assets in the LLC would be at risk.
  • Having the LLC as the owner on the deed protects your identity.

3.     Revocable Living Trusts – is it just about avoiding probate for out-of-state summer homes?

  • The location of the real property is the location for the probate process.
  • Putting a residence into a revocable trust allows one to minimize probate all together and eliminate it with respect to the state where one has only a residence.
  • The trust provides for a succession of authority to manage the residence in trust.   

4.     Qualified Personal Residence Trusts (QPRTs) allow for great discounts, but is it an appropriate strategy to use with the $5,000,000 exemption?

  • The way the QPRT is structured allows the value of the asset in trust to shrink; this was especially useful when the estate and gift tax exemption amount was $1MM.
  • There is a "mortality risk" with this type of trust; if one dies before the trust terms end (10-15 years on average), then the asset gets clawed back into the estate (subject to taxation).
  • For the remainder of 2012, the exemption is $5MM per person.
    • For many clients this higher exemption amount removes the need to put the asset in a QPRT to get the discount and shrink the asset for gift tax purposes.
    • Utilizing a simple trust, such as the Lifetime Credit Shelter Trust, provides more flexibility – one does not have to replace the asset in trust with an asset of equal value if the property is sold.

5.     Lifetime Credit Shelter Trusts (LCST) don't allow discounts beyond market discounts, but is the flexibility with the trust worth the loss of discounts?

  • Unlike the QPRT, there is no trust term that the grantor must outlive.
  • If one decides to sell the property that is in the trust, it does not have to be replaced with property of equal value.
  • If one gives a house away via a trust to a spouse, one still has access to the property.
  • There is a built-in depreciation in using this strategy, because real estate is currently valued low.

6.     When funding a trust with life insurance or other assets to provide liquidity, who pays the bills to fund the expenses for the residence and how does this affect the family dynamics?

  • The life insurance policy payout would go toward the expenses of the residence.
  • Renting a residence out also allows for an income stream to pay for expenses.

7.     What can we do with lifetime trusts for children after the parents pass away? Is the asset protection for children in their marriages and the exemption from generation-skipping transfer tax worth the effort? 

  • In the event of a divorce, the child's spouse is not entitled to any of the assets in trust.
  • The exemption from generation-skipping transfer tax is worth the effort because the trust will pass tax-free to grandchildren upon the death of the children. 

8.    Should there be a family mission statement for seasonal/vacation residences? Does having the family home preserved in trust for generations lead to more stress and divisiveness for your children, or does it achieve your goal of creating generations of happy family members at the retreat?

  • The family mission helps to manage expectations and to provide a plan to both minimize any burden of expenses or maintenance on the children and to ensure that the family enjoys the second residence for many generations.

9.    How critical is it to confirm that all deeds have been retitled, all tax forms filed, and lease agreements executed?

  • All of these steps are extremely critical because if one fails to complete them, the IRS would not acknowledge the formality of the trust and one would lose the tax exemption that the trust structure was intended to provide.
  • The property and casualty insurance carrier should be notified when ownership of the property is transferred to the trust.

10.  What is the rule in New York, for example, for the use of a trust as a vehicle to hold properties located in New York by owners who work in, but live outside of New York? Are there strategies to avoid the income tax on non-New York residents using a trust?

  • The strategy here would be to put the property into trust whereby one would give up control of the property in name.

For more information on planning strategies for second residences from McManus & Associates, which this month was chosen as the winner of the 2012 Corporate Intl Magazine Global Award for "Asset Protection Law, Firm of the Year in New Jersey," visit

About McManus & Associates

McManus & Associates, a trusts and estates law firm, was formed in 1991 by John O. McManus to provide the high quality experience of the largest firms coupled with the intimacy and efficiency of a specialized boutique firm. Over 20 years later, McManus & Associates continues to earn its reputation for integrity, intellectual ability, efficiency, and enduring relationships.

For more information contact:
Lauren DuBois
(917) 573-2485

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