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Including Boats or Yachts in an Estate Plan

Posted on: May 23rd, 2016
estate planning with boatsMany people seeking to enjoy vacation destinations or business travel might consider purchasing a yacht. Boats and yachts could be sentimental items and possibly sources of income, depending on the manner of use. North Carolina is home to more than 378,000 registered vessels, according to the 2011 National Recreational Boating Survey. When boat owners decide how they will transfer vessels to children or grandchildren, or how to preserve the boat for income-generating purposes after they die, they face several options with varying degrees of benefits. Here are a few ways to include a boat or yacht in an estate plan:
  • QPRT. Qualified Personal Residence Trusts (QPRTs) are tools that allow a property owner to remain in the home for a specific period of time before transferring the home to family members (or a charity) at a gift tax discount. Not only does the grantor enjoy the tax discount, but the appreciation of the home held in trust is not valued as part of the owner’s taxable estate if the grantor survives the term of the trust. Funding a QPRT with a yacht or boat may not be possible in all circumstances, but might be an option if the vessel owners use the watercraft as their primary residence.
  • FLLC. Family Limited Liability Companies (FLLCs) are asset protection tools used to preserve assets of family businesses. An FLLC might be particularly attractive if a boat or yacht is used as part of a family charter business or yacht refurbishing business. FLLCs offer a number of non-tax benefits, including third party claim protection and business interruption protection, among many others.
Certain tax planning techniques might help to minimize taxes throughout a boat owner’s lifetime. For example, the owner of the vessel might be able to deduct mortgage interest if the boat meets IRS criterion as a second residence. If the owner operates a business, they might be able to claim certain business deductions in relation to the boat or potentially classify the yacht as their primary home office to allow for further deductions. According to the Internal Revenue Service, “the term ‘home’ includes a house, apartment, condominium, mobile home, boat, or similar property which provides basic living accommodations.” If the owner is using the vessel for charter services or other yacht type business, they may not be able to claim the home office deduction but might be eligible for certain deductible yacht expenses. Options should be discussed with an experienced tax preparer to ensure that the vessel and use thereof meets all IRS criterion for claiming appropriate deductions.

Owners of yachts or other watercraft should take care to address the transfer of the watercraft in their estate plan and should consider providing for funds and/or instructions for the ongoing care and maintenance of the vessel in one’s planning documents. Watercraft, unlike real property and financial accounts, have a unique set of maritime laws associated with their operation. Boat and yacht owners may be familiar with these laws and regular watercraft maintenance, but an inexperienced family member or close friend who inherits a boat may not. Not only could the maritime regulations cause administrative issues for one’s executor or trustee, but the transfer of the vessel could place a tax burden on the heir if transfer of the vessel had not been considered and provided for in one’s estate plan.
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