Planning for the Family Vacation Home
Hi, thank you for tuning into today’s Emerald GEM, which stands for Get Educated in Minutes. I’m Matthew Lee, director of Wealth Strategies for Wilmington Trust’s Emerald Family Office & Advisory and your host for today’s podcast. In today’s GEM, I’m going to answer the question: How can holding a vacation home in a limited liability company enhance an overall estate plan?
Here at Wilmington Trust, we often work with clients who own vacation homes in addition to their primary residences. Frequently, these properties have significant economic value, sometimes comprising a sizable portion of a client’s overall net worth, but also hold sentimental value as the location of cherished family memories, holidays, and other milestone events. Because these properties can have such great value, both monetary and emotional, it’s often critical that they be specifically incorporated into an overall wealth and estate plan.
When it comes to planning for a vacation home, no one plan is going to be right for every family or every type of property. Like the families and homes themselves, each plan needs to be unique and customized to meet the specific goals of the family and to address the particulars of the real estate. The right plan could include holding property in individual or joint name, in the name of a trust, whether revocable or irrevocable, or in the name of an entity, like a limited liability company. Sometimes it includes a combination of these, for example, holding property in an entity that’s owned by a trust.
Each of these options should be considered when incorporating a vacation home into an estate plan before deciding on the best course of action. On today’s podcast, we’ll focus on one particular strategy—holding property in a limited liability company, or LLC, and discuss how that could accomplish a number of common planning goals, including facilitating wealth transfer, simplifying estate administration, and implementing a governance structure. And with that, let’s get to it.
One of the most common estate planning goals is to facilitate the transfer of wealth from one generation to the next in a tax-efficient manner. Placing a vacation home in an LLC could accomplish this objective in several ways. When a property is transferred to an LLC, that LLC could be owned by one individual, known as a single member LLC, or multiple individuals, known as a multimember LLC. In the family context, this means that a parent or grandparent could be the initial owner, or member, but over time they could elect to gift some or all of their ownership to junior generations, such as children or grandchildren, or a to a trust for their benefit. While transferring equity ownership of the LLC, the senior family member could also choose to retain certain managerial powers, functionally giving them control over the home while still transferring partial ownership.
“Fractionalizing” ownership and responsibilities this way facilitates an orderly transfer of an important family asset and can do so in a tax-efficient manner. By gifting fractional interest in the LLC, and thus the underlying real estate, a senior member of the family is able to take advantage of the historically high lifetime exemption from federal gift and estate tax, which beginning in 2026 will be $15MM per person, or $30MM for a married couple, and will be indexed for inflation each year after that. Moreover, because the senior family member is giving partial interests in the LLC, which may or may not have limited rights associated with them, certain discounts may be applied to the value of the gifted interests, potentially reducing the amount of exemption used on that transfer. These discounts, which could be for lack of control or marketability, could be as much as 30 percent or more, depending on the particular facts and circumstances, allowing the senior member to substantially leverage their lifetime exemption.
Likewise, when a senior member passes away, discounts also may be applied to the value of their retained interest in the LLC when determining their estate tax liability. This could mitigate their estate tax exposure at death, and thus potentially reduce estate taxes paid. For individuals living in states with a separate state level estate tax or whose homes are located in those states, this could be of particular importance because the exemptions from those taxes could be substantially lower than the federal threshold. Therefore, by holding the real estate in the LLC, the senior family member could transfer the property to their family members, either during lifetime or at death, tax efficiently.
Another common goal in estate planning is to streamline estate administration, which can be costly and time-consuming for a family. Clients are often looking for ways to simplify matters and holding a vacation home in an LLC could accomplish that objective. If the proper provisions are included, an LLC’s governing document, known as an operating agreement, could spell out how an ownership, or membership, interest is transferred at death.
For example, the operating agreement could provide that, at death, a deceased member’s interest passes to other surviving family members. In this regard, the agreement acts as a will substitute, allowing an interest in the LLC to pass outside of a deceased member’s will, thereby avoiding probate. When a vacation home is in a state other than the owner’s primary state of residence, this would be especially important. If that were the case, a second probate could be required in the state where the property is located, compounding the cost and time associated with the administration of the estate. Transferring property to an LLC could avoid that result. Instead, the membership would pass according to the terms of the underlying operating agreement, simplifying matters and helping to accomplish that common estate planning goal.
Although vacation homes can be a source of great joy, unfortunately they can also become a source of family tension, especially after the passing of a senior family member who previously owned, maintained, or paid for the property. Holding the home in an LLC could help to mitigate that risk. In addition to facilitating wealth transfer and simplifying estate administration, an LLC can also be beneficial in creating a governance structure for a treasured family asset. As noted earlier, an LLC would be governed by the terms of its operating agreement. Among other things, the agreement could include provisions around how the vacation home is to be used, maintained, and paid for, all of which, if unaddressed, could become sources of family conflict.
For example, the agreement could spell out when or how different branches of the family could use the property, and what their responsibilities are for maintaining it, both in terms of financial commitment and sweat equity. The agreement could also specify how and under what terms a family member could exit from their ownership of the LLC or new members could be added. This could be beneficial to avoid the undesired family strife that can occur if a family member no longer wishes to use the vacation home or upon the unanticipated death or divorce of a family member. As a family changes over time, it’s critical that the governance structure that owns their prized vacation home be able to evolve along with them. Since the operating agreement can be amended as needed, the LLC provides the flexibility that many families need, hopefully reducing the risk of family discord that could arise in these circumstances.
On today’s podcast, I’ve touched on some common estate planning goals that could be achieved by holding a vacation home in an LLC, but there are other benefits as well. To name a few, holding a property in an LLC could also add a layer of privacy where a family wishes to own property discreetly. It could also provide additional creditor protection for the family and the property, which could be especially important if the home were ever to be rented. As I noted earlier, these potential benefits and other relevant considerations should be carefully reviewed by you and your legal and tax advisors before finalizing any plan for your cherished vacation home.
Thanks again for joining us today. I hope you found our GEM to be helpful. Please contact your Wilmington Trust advisor if you have any questions about your family’s vacation home and how holding it in an LLC can enhance your estate plan. We would be glad to help you. If you have a topic that you would like us to discuss on a future GEM, please let us know. Send an email to Emerald@wilmingtontrust.com. See you next time!
DISCLOSURE
This podcast is for general information only and is not intended as an offer or solicitation for the sale of any financial, product, service, or other professional advice. The information in this podcast has been obtained from sources believed to be reliable, but it's accuracy and completeness are not guaranteed.
The opinions, estimates and projections expressed are subject to change without notice. Wilmington Trust is not authorized to and does not provide legal, accounting or tax advice. Our advice and recommendations provided to you is illustrative only and subject to the opinions and advice of your own attorney, tax advisor, or other professional advisor.
Diversification does not ensure a profit or guarantee against a loss. There is no assurance that any investment, financial, or estate planning strategy will be successful. Past performance cannot guarantee future results. Investing involves risk. You may incur a profit or a loss. Investment products are not insured by the FDIC or any other governmental agency and are not deposits of, or other obligations of or guaranteed by Wilmington Trust M&T Bank or any other bank or entity and are subject to risks including a possible loss of the principal amount invested.
Wilmington Trust, Emerald Family Office and Advisory is a registered trademark and refers to Wealth Planning Family Office and advisory Services provided by Wilmington Trust NA. A member of the m and t family, Wilmington Trust Family Office is a service mark for an offering of family office and advisory services provided by Wilmington Trust, NA.
Wilmington Trust is a registered service Mark used in connection with various fiduciary and non-fiduciary services offered by certain subsidiaries of M&T Bank Corporation.
Copyright 2025 M&T Bank Corporation, and its affiliates and subsidiaries, all rights reserved.
Equal Housing Lender. Bank NMLS #381076. Member FDIC.
10 min read
