What Estate-Planning Issues Must be

Addressed When Passing On a Vacation

Home?

If you own a home in a vacation area, it may be one of

your family's most cherished possessions. Your children

may have fond memories of times spent there over the

years. And if your children are grown and married, with

families of their own, the home may serve as the perfect

location for enjoyable family reunions.

Yet, just as a vacation home can enhance family bonds,

it can wreak havoc if parents fail to plan appropriately

for the transfer of the property after their death. Passing

on a vacation home to children and grandchildren can

raise complex issues regarding taxes, maintenance costs

and property management. An attorney experienced in

estate planning and elder law can help you consider

such issues as the following:

* Federal estate tax. The top federal estate-tax rate

is 46%. The exemption from federal estate tax is

$2 million per person. With planning, a married

couple can transfer up to $4 million in assets

without incurring any estate-tax consequences.

* Federal gift tax. Every individual is allowed to give

$12,000 a year, per person, to any beneficiary or

beneficiaries he or she selects. Individuals are

entitled to give away $1 million during their lifetime

without gift-tax consequences.

* State estate tax. Many states have an estate tax. For

example, the New York estate tax applies once the

value of an estate exceeds $1 million.

* Capital gains tax. Vacation homes purchased many

years ago may have appreciated significantly in

value. If and when the home is sold, there may be

substantial capital gains tax due. Capital gains tax

issues to consider include:

? Carryover basis. If a vacation home is transferred

directly to children and/or grandchildren during

the lifetime of the parents, the parents? cost basis

carries over to the children and/or grandchildren

and may result in a significant capital gains tax

when the property is sold.

? Step up in basis. Currently, when a property

passes to children and/or grandchildren at the

death of the parents, the cost basis in the

property is adjusted (or ?steps up?) to the fair

market value as of the date of the parents? death.

This may result in significant tax savings when the

property is eventually sold.

? Principal residence exclusion. A single person has

an exclusion of $250,000 from capital gains tax on

the sale of a principal residence. For a married

couple, this exclusion is $500,000.

* Estate-tax freeze. It is possible to transfer a property

in such a way that future appreciation shifts mostly

to children, freezing the value of the parents? interest

for tax purposes.

* Discounted gifts. It is possible to transfer assets to

future generations in such a way that the gift

receives a discount for federal estate- and gift-tax

purposes and for state estate-tax purposes, if

applicable.

* Nursing home claims. If one spouse becomes ill and

needs Medicaid to cover medical expenses, Medicaid

will require that the vacation home be sold and the

proceeds used to pay for care.

* Creditor protection. Certain forms of ownership

offer protection from creditors.

* Control. Parents must decide if they want to retain

control of the property during their lifetimes.