If you own a lake house, a beach cottage, or any family cabin you want the kids to keep, the will you signed is probably the worst tool for the job. There is a quieter route your estate attorney may have mentioned once and never explained: put the property inside a family LLC, then gift the membership units to your children a slice at a time. It sidesteps probate, locks down the rules of shared ownership, and can stretch your gift tax capacity well beyond the sticker price of the annual exclusion.
The Buried Move: Gift Shares of the LLC, Not the House
Here is the reveal. You deed the vacation property into a limited liability company that you (and your spouse) own. Then, instead of leaving the real estate itself in a will, you gift LLC membership interests to your children while you are alive, or leave those interests in a revocable trust. Because the asset your heirs inherit is an LLC interest, not a chunk of dirt, it passes under the operating agreement, not under state probate court. The operating agreement, drafted once by you, dictates who uses the house which weeks, how property taxes and repairs get split, how much each owner contributes to a repair reserve, and, critically, whether any heir can ever sell to an outsider.
The Legal Anchor
LLC interests are personal property governed by your state’s LLC act and the operating agreement, which is why they avoid probate on the underlying real estate. Gifts of those interests are subject to federal gift tax rules under Internal Revenue Code Sections 2501-2524. For 2026, the IRS confirmed in Revenue Procedure 2025-32 that the annual exclusion for gifts remains at $19,000 per recipient, and estates of decedents who die during 2026 have a basic exclusion amount of $15,000,000, up from a total of $13,990,000 for estates of decedents who died in 2025. Married couples can double both figures by splitting gifts.
Who This Actually Fits
This is built for families with a specific, hard-to-divide property, typically a vacation home, and adult children who genuinely want to share it. It works whether the house is paid off or mortgaged (though a lender’s consent may be required). It does not work if one kid wants cash and the others want the cabin, if the property carries a homestead exemption you would lose by transferring it, or if you are the only one who ever actually goes there. An LLC cannot repair a family that does not want to co-own something.
How the Mechanics Play Out
- Form the LLC in the state where the property sits, and deed the house into it. Update title insurance and notify your mortgage lender and homeowner’s insurance carrier before recording.
- Draft an operating agreement that spells out use calendars, cost-sharing, a funded reserve for repairs, buy-sell terms, and transfer restrictions blocking sales to non-family.
- Hire a qualified appraiser to value the LLC and, separately, minority non-controlling interests. Because those interests lack control and marketability, they are often appraised below their pro-rata share of the underlying real estate, which stretches how much you can gift under the $19,000 annual exclusion.
- Gift units each year to each child (and each in-law or grandchild, if you want), filing Form 709 whenever a gift exceeds $19,000 to any one person.
- Keep the LLC real: separate bank account, annual meetings, minutes, and state filings. A paper-only LLC gets ignored by courts and the IRS.
The Catch You Cannot Ignore
Three traps. First, valuation discounts are one of the most audited moves in estate planning. Skip the qualified appraisal or inflate the discount and you invite the IRS in, potentially years later. Second, gifted interests carry your original cost basis. Assets inherited at death generally receive a step-up in basis to fair market value; interests you hand out during life do not. With the Case-Shiller National Home Price Index at 335.1 as of May 2026, sitting in the 90th percentile historically, that lost step-up can be expensive if the kids ever sell. Third, real costs: formation fees, annual state filings, legal drafting, appraisals, and possible bumps to insurance premiums or a lender demand to refinance in the LLC’s name. Run the numbers before you deed anything.
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