Vacation homes by the beach, ski slopes or in the countryside are a great source of enjoyment and pride for a family. For most families, the intention is to pass ownership down to children and eventually grandchildren. However, there are numerous financial and emotional factors involved in transferring real estate to the next generation.

Tax strategy for transferring property is a tradeoff between income and estate taxes. If you do not have a taxable estate, then it makes sense to transfer property at death so your family members get a step-up in basis. If your family expects to pay estate taxes at your death, then there are a number of techniques designed to lower the tax bill.

For a refresher, under current Federal law estate tax law, each individual can pass $5.25M of property tax-free (there is no limitation if passing outright to a spouse), however, each State has its own limit of tax-free transfers (NJ’s is $675,000 and NY’s is $1M). A married couple can pass $10.5M of property estate tax free for Federal purposes.

The easiest and least expensive way to transfer a vacation home is through an outright gift during your life but this means giving up control of the property once the gift is made. This can be accomplished through a single gift of the fair market value of the home or giving away fractional shares of the house using the annual gift tax exclusion. The current annual gift tax exclusion is $14,000 per person. Thus, a couple with two adult children could transfer $56,000 of the home’s value in 2013.

Another common transfer option is using a qualified personal residence trust (QPRT). The QPRT has a set term of years (anywhere from 10-20 years) and ownership is transferred to a trust. For the length of the trust term, the original owner maintains the same level of use and is responsible for paying taxes and other expenses. Once the trust term expires, the beneficiaries assume ownership and are responsible for the taxes and other expenses.

An additional benefit/drawback for minimizing the grantor’s estate is they are required to pay fair market value for renting the property if they continue to live in or use the house regularly. A disadvantage of the QPRT is if the grantor dies during the trust term then the home reverts to his or her taxable estate.

Of course the most important factor in transferring a home is to make sure the next generation wants to keep the house, has the resources to maintain the property and the tools necessary make decisions together.