Father is planning to transfer valuable second home/investment property to me via trust - which to choose?
Hi WSO Real Estate experts,
As part of his estate planning, my father has told me he is planning to transfer a significant piece of property that he owns to a trust with me named as the remainder beneficiary.
He is planning to do the same for my siblings, but because I am the oldest child, he is letting me pick first.
I've narrowed it down to a shortlist of four properties that I like and have ranked then below in order of Zillow estimate or "Zestimate" (I know, I know... not accurate... but need to start somewhere) from highest to lowest:
1) a single family winter home in an exclusive enclave in the Rockies (think Aspen, Vail, etc.) about a 7 min drive to the ski mountains
2) a single family summer home in a high-cost area in the Mid-Atlantic / Northeast (think the Hamptons, Martha's Vineyard, etc.)
3) a single family summer home in a high-cost area in Florida (think Miami Beach, WPB)
4) a "ski-in ski-out" chalet in Whistler Canada (not going to bother obscuring this one...)
I am a complete novice when it comes to real estate, but obviously my main consideration ultimately is long term appreciation... I realize this is impossible to predict, but if you had to take a shot in the dark, which of these properties is likely to be the most valuable 20-30 years from now? Or is this is a dumb question and I should absolutely 100% take the house in the Rockies because it's the most expensive?
Also, it is highly unlikely for me to ever live in any of these properties full-time, so generating some kind of rental income to offset eventual carrying costs is another important consideration, but here I truly do not know what I do not know (e.g. potential issues I need to be aware of as an out-of-state landlord? How to even rent out properties in this price range to begin with?, etc.)
How should I be thinking about this decision given I will most likely not actually take ownership of this asset for another 20-30 years but will be given partial responsibility for the asset as if I owned it (e.g. suppose I wanted to rent out the property, my father says I have to be responsible for everything involved end-to-end and I am not allowed to rely on him or members of his staff for help)
Thank you in advance for any advice you may be able to offer.
Your family seems to own 4 homes all in expensive areas, I think you'll be ok regardless lol. I don't think the few hundred k in revenue you may get when you're not there will matter. But I think from a rental standpoint the Vail like one is up there, palm beach/miami is good as well. Hamptons too. All can rent well in the season.
Enviable position to be in. Given the options are all quite good, I think instead of the rental value you should consider which place you would genuinely want to spend time. Even if you plan to rent it out most of the time I would expect you would need to be there in person at least a few times. You might find you really do want to live there instead of renting. What would be convenient for your lifestyle now, 5 years from now, 15 years etc.? I presume you have been to each property before. Go with the one you like and know you’ll take good care of.
There are two components to this decision and you really need to include both of them. How much weight you give one vs the other isn’t something we can tell you though. It’s something you have to decide for yourself.
The first thing is to understand the value of these properties today, because predicting the value of a property 20-30 years from now is just an educated guess more than anything. If they’re currently rentals, or partial rentals, compare the income statements of the last couple years for each. If none of them are rentals, compare the value of each, either through actual appraisals, realtor BOVs, or just going on Zillow and getting a rough estimate. If none of them are rentals but you’d want to rent them, check what similarly priced houses rent for in the area. It’s not always the most valuable house at face value that will generate the most income. Finally, I’m not sure how the international aspect of the Whistler home will impact this decision, either in the initial transfer or down the line. If you’re not already sure, you need to check with your accountant. It sounds like you’ve started this process at some level.
The other element to this decision is more emotional, but this is residential real estate we’re talking about. You’re allowed to be emotional. Do any of these homes have sentimental value with you and your Dad? Do any of these homes fit either your lifestyle now or a lifestyle you envision for yourself? Which house would you enjoy using the most? Which house would be easiest to get to for you so you’d actually visit it twice a year for the next 20-30 years? You’re going to have a family, kids, etc. Finally, do you and your siblings get along well? Do any of these homes immediately jump out as “their place?” - like “Man, my sister Katherine has adored Martha’s Vineyard ever since she was a little girl. It’s all she talked about growing up and it’s where she’s happiest.” Things like that may sound trivial, but they matter in the long run.
For me, the first choice would be 1 vs. 4 because it’s Apples to Apples. You say the Rockies place is more valuable. Dramatically so, or just marginally? If you and your wife or you and your boys wanted to go on a ski trip tomorrow - would you grab tickets to the Rockies home or the Whistler home? You can rule one of these out relatively quickly. Then it comes down to do you, from a financial standpoint or an emotional standpoint, want to own a winter ski house, a northeastern summer home, or a Florida home? I have no interest in a Florida home or dealing with the Florida home insurance disaster (or the idea that my house could be under water by the time it’s mine in 30 years) so that would be an easy one for me to rule out. Maybe you work in NYC and love the idea of escaping to the Hamptons for the weekend while renting it out the weekends you don’t. Maybe you work in NYC and have zero interest in the Hamptons and would much rather have 1-2 trips a year to ski country while renting it out the weeks you don’t ski. Maybe the Rockies home is literally worth 3x the other homes and at some point, you’d just be dumb not to take that one on. Maybe it’s only worth 5% more.
You have to weight all of these elements against the other and realize that there’s no real wrong decision here - you’re getting a present at the end of the day - so do some background work, take your own enjoyment into account, and make a call.
This sums it up.
It shouldn't take more than like 30 mins of research on zillow and airbnb to figure out an approximate value for each based on recent sales and rental rates. But I wouldn't make this a priority unless maybe one is a major outlier. If your parents own 4 luxury vacation homes you're going to be fine financially anyway.
Just pick the one you actually want, would realistically use the most, and would the the least of a burden to maintain and pay taxes/insurance on.
Also, I've never really dug into this, but if looking at potential rental income I would assume like 70% of the revenue is lost to PM fees, vacancy/seasonality, time you use it yourself, plus maintenance/insurance/utilities/taxes etc... so if you see a comparable home on airbnb for $10k/week don't think you'd be making anywhere near $500k in profit, its probably closer to $150k, and thats not including any mortgage costs.
Thank you to everyone who responded so far. These have been really helpful.
CRE's comment happened to be labeled the "Most Helpful", so I will respond to him first before responding to the other ones.
To answer your question - I am absolutely positive that none of these properties are rentals - so there are no income statements that I am aware of. I realize it sounds sad (and wasteful), but these properties mostly sit unoccupied unless someone from our immediate family or extended family (aunts/uncles/cousins) and occasionally my father's friends or people he does business with wants to use them.
On the emotional side - I suppose the Northeast summer home and Whistler chalet have the greatest sentimental value, as I stayed at these places growing up and almost every year until right around the time I graduated from college. The Northeast summer home would be geographically speaking be the closest to where I currently live, but might not necessarily be "easy" to get to as I do not expect to have access to private boat/helicopter/etc. The home in the Rockies has decidedly less sentimental value, as we did not go there as a child, and as an adult I have gone there only twice, maybe three times (not because I don't want to, but because my stepmother uses this home quite a bit and I try to avoid her as much as possible). Having said that, the Rockies home is more expensive than the 2nd most expensive property by at least a conservative 2x, so for example, if the Northeast summer home was $5 million, the home in the Rockies is $10 million (not the actual numbers, just to illustrate the point). The summer home in Florida, I've actually never stepped foot in because that is where my stepmother spends most of her time. Worth mentioning the Florida home is also the "newest" home in terms of the year when it was built, while the Northeast summer home and Whistler chalet are older assets that have been maintained well, but not remodeled/renovated. The Rockies home's age is somewhere in the middle between Florida and Northeast/Whistler. You raise a good point about Florida being underwater in the future (although would it be really under water in 30 years time Would it be more like after 100+ years?), lol... either way, perhaps me and my siblings should leave that home for our stepmother and maybe she can drown in it
Anyways, thank you again for taking the time to write this all up. You have given me much to think about.
No problem with that. I wouldn't want strangers having sex in my bed either. Just means that if you want to rent them, you have to do some homework if income potential is a deciding factor. You need to see what similar houses in each area rent for and how booked they typically are. A realtor can sometimes help with this.
Glad you're starting to think through the nostalgic side though (including letting stepmothers drown - I identify with the thought!). No wrong answers here, just need to way the sentimentality vs. the value differences and see what comes out in the end. In general, go with your gut feeling. You'll know the right call.
My only advice is to get your accountant involved in the decision making and planning process now. I'm on the other side of this equation at the moment and about to be hit with a 7-figure tax bill because tax treatment was not optimized.
Was there a trust involved or no? Ugh, more money for dementia Joe and cocaine Mitch.
Yes, ownership has been in a trust beginning with the purchase of the land ~30 years ago. I spent quite a bit of time exploring the 1031 option, but there are too many strings attached to it for what would be reinvestment into a new primary residence for me to be able to sleep at night... additionally, we had some money moving around the IRS may not have liked too much ($ from individuals paying for improvements that weren't reported as income to trust, living in home rent free, etc) that we didn't care to deal with if a 1031 triggered an audit so I am just going to bite the bullet and write a big check. At the end of the day its not the worst problem in the world to have. At the very least, I can sleep well knowing that my tax dollars will probably cover the fuel cost for 1/4 of a flyover at the start of the next NFL season.
Have you pm’d Smoke Frog?
Ask Smoke Frog, his dad gives him everything
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One additional item to consider when considering future value (I know you can't predict value, but it would be foolish to not think about it ahead of time) is to look at the physical location of each piece of real estate as well. Does the house in the Rockies have an unobstructed mountain view? Does the house in the Hamptons/Martha's Vineyard have a clear water view? Are there neighboring parcels that are underdeveloped that could lead to future development which would impact your property? Especially in these locations, the physical location and orientation of the property will play a role in the future appreciation of the property. Of course, if all are equal, that's obviously a good problem to have but just remember that location matters in real estate.
Also, I would probably avoid the Florida property unless you want to worry about hurricanes (insurance costs) every year and the international property as there are too many unknowns in terms of taxes, travel or legislation.
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