How to Keep Your Vacation Home in the Family?

Most families invest in a vacation home with the intention that it will be a special place for the extended family to enjoy and celebrate family traditions for generations.  The value of a vacation home can be significant – both sentimentally and monetarily.  However, without proper estate planning, the property that you thought would keep the family united may instead become a source of conflict or a burden rather than a blessing.

If this is a property that you wish to pass on to your children and grandchildren so that the good times can continue long after you’re gone, here are 5 key things to consider and plan for NOW:

 

• Do Your Children Share Your Hopes and Dreams?

You may intend to leave your vacation home to all of your children to use and enjoy for their lifetimes. When planning, it is important to consider whether these intentions are realistic. Take a hard look at how the property is used and by whom. Do all of your children enjoy the property and will they continue to do so in the future, taking into account their busy lives and where they live?  Or is the home primarily used by one or two children who live close enough to visit often? When planning for the future of your vacation home, talk to your children about your plans and encourage them to be honest with you.  Knowing who wants to keep the property and who has no interest in owning a second home is vital information before you begin your planning.

 

• How Should the Property be Owned?

Traditional ownership is almost never the best solution for vacation homes, regardless of whether you have a lake home, a mountain cabin, or a beach house.  Without more specialized planning, it is likely ownership will become fractionalized over time.  This means that future generations of family members who cannot afford their share of property maintenance, or who live too far away to use it, or who would just rather have the money, can exercise a right to partition the property and force a sale.

Vacation properties (especially lake homes) can also carry inherent liabilities. Protecting those from threats like claims, lawsuits, creditors, etc. is vital to ensure that this treasured asset is preserved as long as possible. Options for ownership of a vacation home can include an LLC or a Trust which both allow for you to maintain control of the property during your lifetime as well as protect it from those threats and liabilities and also ensure a smooth transfer at death to the next generation.

Are you wondering how to structure the ownership or protect your own vacation home? Call 615-933-7636 to learn more.

 

• How Will the Expenses Get Paid?

If you intend for your children to contribute to the cost of maintaining the property after your death, consider whether all of your children can afford to do this, or whether it makes sense to leave the property (and the financial burdens of its maintenance) to the child or children who can afford the expenses that go along with owning such a property.  If you are financially able to do so, you may want to leave extra money to support the property which can be used to pay ongoing expenses and make repairs as needed and take the burden of those expenses off of your family members.  If this is the route you choose to go, don’t underestimate the funds that may be needed, and err on the generous side if you are unsure.

 

• How Will Important Decisions be Made?

No matter how smart your children are or how well they get along, it is always helpful to have a plan for how decisions will be made – such as who can use the property and when, what improvements will be made to the property, and whether the property should be sold.  It is helpful, whether in a Trust or other written agreement to set out rules that clearly govern how these matters are decided, and how disputes are resolved.  If a child cannot contribute to his share of the expenses, or wants to sell his interest in the property, a structured plan will allow for such transitions, including the opportunity for siblings to buy out one another.

 

• What Happens with the Estate Taxes?

Vacation homes are often a beloved asset, but they are an asset nonetheless, subject to estate tax like the other assets in your estate.  It is crucial to take into account how estate taxes will be paid when planning for a vacation home that will not be sold.  In some sad situations, the next generation would love to keep the vacation property, but the estate taxes payable at the parents’ deaths are so steep that they cannot afford to do so.  Consider undertaking planning to reduce the tax sting at your death by gifting the property or an interest in the property during your lifetime, and at your children’s death by incorporating generation-skipping planning.  If taxes must be paid, consider using life insurance to provide a resource from which estate taxes can be paid, reducing the possibility that the property will need to be sold to satisfy a tax obligation.

 

Thoughtful and timely planning for a vacation property can ensure the property will pass to future generations in a way that will minimize issues and maximize the chances the property will be enjoyed by your family for generations to come.  Failing to plan and simply hoping that your children will “figure it out” is the clearest path to family disharmony, which is the last thing you need on a relaxing family vacation.

 

 If you have a vision of your descendants enjoying your beloved home and building memories there, take the necessary steps now to make your wishes come true and call Legacy Law at 615-933-7636 to get started!