The members of many New Hampshire families own not only their own year-round residences but also family “camps” consisting of vacation homes and surrounding land, often located on New Hampshire lakeshores. Various branches of these families typically visit and reside for a week or more in these vacation homes every year. I’m sometimes requested by these families to advise them on how to handle the legal and tax issues concerning their vacation properties. The answers to their questions are sometimes complex and need to be carefully tailored. But here are some general guidelines:
To avoid ambiguities and possible intra-family disputes, these families often need written documents setting forth comprehensive rules for family members’ use of their vacation properties. Many families have these documents. Surprisingly, many don’t.
These usage rules should address, among other things, vacation home occupancy scheduling; requirements concerning home maintenance and clean-ups during and immediately after visits; and rules concerning parking, non-family guests, parties, and utility usage.
If vacation properties are owned by individual family members or by two or more family members as tenants in common, family members should consider transferring these properties into trusts or LLCs, and, in their trust agreements or LLC operating agreements, they should set
forth rules governing, among other things:
■Whether family members may sell their interests in these properties to third parties; and
■Transfers of vacation homes by members of the families’ current generation to future generations.
However, in transferring their vacation properties into trusts or LLCs, family members should always consult with professionals who have expertise concerning the New Hampshire Real Estate Transfer Tax. In the absence of specific exemptions, this tax generally applies at an aggregate rate of 1.5% of the fair market value of the transferred vacation properties in question.
Thus, for example, if a vacation home has a fair market value of $500,000 (not at all unusual in the current vacation home real estate market), the aggregate tax will be $7,500 — not a tax to sniff at.
However, the Real Estate Transfer Tax on family vacation property transfers can often be avoided by affected families under statutory exemptions applicable to:
■Transfers in the form of testamentary dispositions (e.g., transfers by will or trust); and
■Transfers in which the direct owners of these properties and the owners or beneficiaries of the entities to which they transfer them are the same owners in the same percentages.
Should these families transfer their vacation property to trusts or, instead, to LLCs? The answer depends on the facts, but in general the answer is LLCs. Among other considerations:
■LLCs provide charging order protections — a powerful form of statutory asset protection that trusts don’t provide.
■LLC operating agreements often provide a better format for formalizing the management, use and transfer of vacation properties than trust agreements can provide.
■Many families rent their vacation properties from time to time to third parties — e.g., to cover ever-increasing New Hampshire real property taxes. LLCs are far better suited than trusts to the operation of real estate rental businesses.
John Cunningham is a lawyer licensed to practice law in New Hampshire and Massachusetts. He is of counsel to the law firm of McLane Middleton, P.A. Contact him at 856-7172 or lawjmc@comcast.net. His website is llc199a.com. For access to all of his Law in the Marketplace columns, visit concordmonitor.com.