TRANSFER OF THE FAMILY CABIN
By Michael Cowles

Many clients have long-standing plans to transfer "vacation home" real estate to their adult children. Unlike leaving the property by will, a lifetime transfer permits them to make the arrangements while they can watch the results. Particularly with vacation properties that are unlikely ever to be sold outside the family, parents of adult children wonder "why put it off?" The next generation may be better motivated to help maintain the property; perhaps the children and in-laws won't disappear the next time the cabin needs painting or the dock needs to be dragged out of the lake.

Gift transfers, however, have many implications. These include a variety of tax issues, including the impact on the tax "basis" of the property for computing capital gain if the property is sold, as well as the possibility that the gift will need to be considered should the parents ever lack the resources to provide for long term care arrangements. Clients (and the children who are often encouraging the transfer) must consider all of the consequences before the gift is made.

Gift Tax Consequences

A transfer to a child "for less than adequate consideration" is treated as a gift for purposes of the federal gift tax. If the value of a present interest in property transferred to a child, when combined with all such gifts made to him or her during the year, exceeds $10,000 for a single donor or $20,000 for a married donor whose spouse joins in the gift, a taxable gift occurs and a gift tax return will need to be filed by April 15 of the year following the year in which the gift is completed. The gift of a "future interest" in property, where use, possession or enjoyment of the property does not immediately commence, may not qualify for the $10,000/$20,000 annual exclusion. Gifts in trust frequently constitute future interests.

Often, no gift tax will be due, because every individual has a credit against estate and gift taxes which allows the transfer of up to $625,000 of property during lifetime or at death without tax being imposed. (The $625,000 credit applies in 1998, but will increase very gradually to $1,000,000 by 2006.) Lifetime taxable gifts re-appear on the estate tax return, and are included in the taxable estate under our unified transfer tax system.

Transfers with Retained Interests

Having the parents retain a life estate in the property will reduce the value of the interest transferred for gift tax purposes. If the life estate is retained, however, or if the donor simply continues to occupy the gifted property until death, the property can be included (at its then-fair market value) in the client's taxable estate at death, and the donee receives a "step-up" in income tax basis at that time.

Sometimes parents want to retain control of the property a little longer and minimize the impact of transfer taxes if they anticipate a taxable estate (including prior taxable gifts) of more than the $625,000 to $1,000,000 unified credit. In these circumstances, a qualified personal residence trust or a family limited partnership may be appropriate. Each of these arrangements fits only a narrow range of family and financial circumstances, and requires some energy to understand, create and maintain, but can provide significant tax savings for the family while preserving the family vacation property for the next generation's enjoyment.

MARITAL AGREEMENTS: FORESIGHT AND PLANNING ARE KEY
By Michael Cowles

In one form or another, most of us have heard (or expressed) a platitude along the lines of "marriage is what you make of it." Couples bring a wide range of expectations to their marriages, particularly the degree to which they anticipate financial independence after the wedding. These expectations can be thwarted if there is a dissolution of marriage, or if the death of one or both of the spouses gives rise under applicable state law to a mandatory division or distribution ofproperty. These statutory spousal rights can result in an allocation of assets which the parties did not anticipate.

Sometimes the prospective husband and wife begin with an understanding that one or both of them bring assets into the marriage over which they intend to retain individual control. This may be a family business interest or assets which are expected to go to the children of a prior marriage. A binding contractual arrangement between the parties can lend some authority to their shared expectations.

In many states, a couple about to be married can enter into a binding premarital agreement, sometimes call an "antenuptial" agreement. This agreement can preserve the authority to control and eventually transfer assets brought to the marriage without reference to rights which a spouse may acquire in the event of dissolution or death of a spouse under state law. In Wisconsin and in some other jurisdictions, a marital property agreement can be entered into after marriage.

Some of these agreements simply protect a single asset, such as a spouse's interest in a family-run business. It is also quite common for the couple to agree that each will retain full authority over the property he or she brings into the marriage, although the parties may voluntarily provide, through will or beneficiary designation, that the assets they control will nevertheless be distributed to a spouse. For these individuals, the desire to determine for themselves questions of control and allocation of their property, rather than to accept the presumptions contained in state law, provides the motivation.

Whatever the intended outcome, the negotiation and documentation of a premarital agreement (or post-marital agreement where available) requires strict attention to the requirements of governing state law. Each party should be separately represented. Each party must provide full and complete disclosure of all assets which he or she brings to the marriage. The agreement needs to be in writing, and in Minnesota the execution of the agreement must take place in the presence of two witnesses and the signatures must be acknowledged by a notary. Failure to comply with these procedural safeguards will likely render the agreement unenforceable. Such a failure is particularly unfortunate if the effort the parties put into reaching an agreement is ultimately wasted.

As with most major life decisions, marriage requires foresight and planning if unsuspected legal traps concerning property rights are to be avoided.