Multigenerational family residences offer a unique blend of shared memories, traditions and living spaces. However, ensuring smooth ownership transitions and equitable usage among family members requires careful planning. Without the requisite forethought and clear direction, the home that provided so many great memories over the years can quickly devolve into a source of contention and frustration among family members.
A long-term or dynastic trust may be the appropriate owner of a family residence. In this scenario, Generation 1 (G1) would gift the property to the trust—along with other income-producing assets that can provide an endowment to cover associated expenses, including real estate taxes, insurance, maintenance and repairs. If the Generation Skipping Transfer Tax Exemption (GST Exemption) is allocated to such a trust, the property can pass from generation to generation without imposition of an estate tax for as long as the applicable state's rule against perpetuities allows. Some states have abolished the rule against perpetuities altogether, allowing property to remain in family trusts forever.
The trust can also be structured as a spousal lifetime access trust (SLAT), where the donor's spouse is named as a beneficiary (sometimes with other descendants). This approach allows G1 to maintain access and use of the property. If the beneficiary spouse predeceases the donor spouse, the donor spouse would need to pay rent to use the property or risk an IRS attempt to include the assets of the trust back in the donor spouse's estate. If the trust is structured as a grantor trust, such rental payments would be ignored for income tax purposes and, in fact, can create additional opportunity to shift value outside of the donor spouse's estate.
The dynastic trust structure is not without limitations. The trust may run out of funds to cover the property expenses. This may necessitate renting the property to members of the familyor to outside third parties or selling the property and investing in other assets, including a more modest property. In addition, once G1 passes, it is important to address how property ownership continues. Does the property stay in a single "pot trust" for all descendants, or does it divide into separate shares for the different branches at the Generation 2 (G2) level? Even if the trust has sufficient funds to cover the expenses of maintaining the property for the foreseeable future, there are numerous issues that may arise in G2 or later generations regarding usage, design, renovations and management.
One approach to managing the property for the benefit of G2 and beyond is to establish a limited liability company (LLC), providing a structured framework for ownership, usage, maintenance and capital improvements.
The LLC operating agreement can address the following:
As the branches of the family expand, it is likely that certain members of the family will have the opportunity to use the property more than others. This may be a function of location, wealth, time or interest. When one or more branches utilize the property disproportionally, this can result in resentment and friction as to the continued value in maintaining the property for the family. While the LLC agreement can include options for terminating the ownership arrangement, including buyouts, forced sales and the like, requiring rental payments from members of the family for use of the property can help address these tensions.
Paying rent ensures that all beneficiaries are contributing fairly to the expenses associated with the property's upkeep, in line with their use of the property. It helps prevent members of the family who do not make regular use of the property from feeling that they are bearing a disproportionate financial burden for an asset that they may not have the desire or ability to enjoy. If the property doesn't have sufficient liquidity, regular rental payments can help fund ongoing maintenance and improvements to the property, ensuring that it remains in good condition for current and future generations.
Depending on the structure of the trust, the rent can be set at a favorable rate for a beneficiary. The rent can be fixed at a point where the beneficiary is incentivized to utilize the property, as opposed to another vacation spot, while also experiencing the beneficial ownership of a trust arrangement. At the same time, because the beneficiary is being charged rent, they are unlikely to take the privilege of using the property for granted. Because they're paying rent, beneficiaries are more likely to treat the property with care and respect, understanding the effort and resources required to maintain it. This approach fosters a sense of responsibility and ownership, encouraging beneficiaries to contribute positively to the property's upkeep.
In conclusion, establishing a structured framework for ownership, usage, expenses and improvements for a multigenerational family residence is critical. By carefully addressing key considerations up front, families can enjoy their shared property for generations to come.
Day Pitney Generations Newsletter
Day Pitney Generations Newsletter
Day Pitney Generations Newsletter
Day Pitney Generations Newsletter
Day Pitney Generations Newsletter
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