Some of our previous Newsletters have described the tax benefits of lifetime gifts to children. Several of our clients have accomplished this in a unique way, by transferring the family beach place (or other recreational property) to their children by gift. If done properly, this can provide tax savings and help to keep a treasured property in the family.

Let's say Mr. and Mrs. Jacobs have four adult children. All the family enjoys occasional use of their modest second home on Pine Island. Mr. and Mrs. Jacobs have a total estate of some $3 million. They are financially comfortable, but are a bit concerned because their accountant has told them their children will pay about $1 million in estate taxes when they pass away.

Mr. and Mrs. Jacobs meet with their accountant and discuss the possibilities for saving taxes by making gifts. They learn they may give as much as $20,000 to each child each year, thus removing as much as $80,000 from their estate each year without any tax cost. This sounds attractive. However, they've just recently retired and aren't sure they should be digging into their $2 million portfolio of stocks and bonds to make gifts just now.

After a few weeks of deliberation and discussion, Mr. and Mrs. Jacobs focus on the Pine Island place as a likely gift to their children. They meet once more with the accountant, this time with their lawyer present also. They decide to set up a beach property trust, with one of the children as trustee. They could give the property directly to their children, who would then own the property as tenants in common. The trust arrangement is preferable, however, because it focuses management of the property in one person, and lessens the chance of a family dispute.

As the beach property is worth about $140,000, Mr. and Mrs. Jacobs can't fit it all within one year's gift exemption (their limit is $80,000, as discussed above). The gift will be made over a two-year period, with a half interest going into the trust each year. In addition to the gift of the property, Mr. and Mrs. Jacobs will make modest gifts of cash to the trust each year, to provide funds for property taxes and repairs. This will avoid the necessity of the trustee's asking their children for regular contributions to the trust, further lessening the chance of a family dispute.

Having adopted the new Pine Island program, Mr. and Mrs. Jacobs have ensured considerable tax savings for their family, amounting to about half the value of the beach place when they pass away. At the same time, they have created a vehicle for keeping the Pine Island place in the family beyond their lifetimes.

There are many variations on this idea. There are also a number of tax and legal details which must be addressed before such a plan is carried out. If you would like to explore this or other tax planning ideas, please call the attorney with whom you work, or Alan Macpherson, Larry Ghilarducci, Al Falk or Eileen Peterson of our Tacoma office.