When people own something of sentimental value, they are sometimes unsure of how to pass it pass it down to their family for future generations to enjoy. This can especially happen with a vacation home or camp that has been in the family for years.
Example: You own a beach or lake-front vacation home for years in a now sought-after area. You have seen your children (and grandchildren) grow up there and recall memories of watching sunsets over the water, roasting marshmallows over a campfire, and teaching the kids how to swim. It may be difficult to think that this home will be sold out of the family when you die and would like to preserve it for enjoyment of generations to come.
- How can you best insure this property will be there for future generations to enjoy (and at times cohabitate), as your family tree grows or in future after your passing?
- Who will be responsible for paying the Insurance? Taxes? Repairs? Maintenance? Fees?
- Who decides which family members or friends use it and when?
- What impact would future divorces or bankruptcies have on the property?
- How can you protect the property from a Medicaid spend down?
While all of your children probably would like to inherit the property and enjoyed the vacation home growing up, some may no longer live in the area or use it on a regular basis. Other relatives may also like to use the property when it is not in use. If you leave the vacation property as part of your estate and divide it among the children, the risk is that some or the majority of siblings may want or need to sell it. Some of your children may not want to pay to maintain an asset they rarely use. Those that do want to keep it may not be able to afford to buy the others out. It can also create sibling squabbles when it comes to its use, cost of repairs or allowing non-family members use the property.
To alleviate your concerns, there are a number of Estate Planning options you should consider for the transfer and management of a vacation property.
Legal Structures for a Vacation Home
You can always transfer the property to one of more children during your lifetime, or leave it as a bequest upon your death. However, this “direct” or outright gifting strategy comes with many risks and potential tax implications. Since no one can predict the future, your family’s vacation home may become a part of future divorce proceedings, bankruptcy, lawsuit or probate. Without proper planning, a vacation home may need to be sold to pay for long-term care costs. The asset may now also be counted for purposes of college financial aid. Worse yet, due to second marriages or death, the house may be inadvertently inherited by in-laws and not stay in the family. The situation may become more complicated if the property is located in a different state or foreign country.
There may be a better legal solution that might work for your family. Several options include:
- Co-ownership. Ownership among family members could include being tenants in common or joint tenants with rights of survivorship. Risks above may still apply, especially if siblings do not get along.
- An Irrevocable Trust. You, the grantor, set up a trust and appoint a trustee to carry out your wishes. Your children (and possibly grandchildren) play a fairly passive role while you are alive. Decisions about the property come from you. The trust would have to be funded with enough assets to pay expenses. With the property held in trust, it may be sheltered from future divorces, an unforeseen bankruptcy, a child who needs public benefits, becomes disabled or in case of their unfortunate death, while simultaneously keeping strategic tax benefits. After your death, the property could continue to be managed within the trust.
- A Limited Liability Company (LLC). The LLC can own the home and would be managed by its members (the beneficiaries – i.e. your children) or an independent property manager. The rights and responsibilities of the members are spelled out in the LLC operating agreement. An LLC can contain specific provisions on the use of the property, sharing of costs, and the transfer, inheritance or selling of member interests. An LLC helps centralize the management function for the property.
Any structure for a vacation property should account for the possibility that eventually the family may no longer want to own the property, it has become cost prohibitive, or receive an offer that they can’t refuse. Whether it be a modest cabin in the Adirondacks, a beach house along the Jersey shore, a condo in Florida, or a ski chalet in the Swiss Alps, the Estate Planning attorneys at the Herzog Law Firm, along your CPA, can help determine which structure is the most beneficial option in your particular situation.
10 Questions to Consider
Here are just some of the questions that families should answer when deciding on a structure for transferring a vacation home to future generations:
- Do family members get along and want to keep the vacation property in the family? If no one is interested in keeping the property, it could simply be sold after your death.
- How should siblings pay for regular maintenance and expenses of the property? Should there be a property manager or will each person pitch in to help with routine and emergency repairs, cleaning, yard work, winter storage, etc.? How are real estate taxes, insurance and utilities paid for? What about remodeling or improving the home or other structures on the property?
- How will disputes be handled among family members? Sometimes conflicts arise on the use of the property or if someone doesn’t contribute their share as agreed upon. Arbitration may help resolve some conflicts.
- How will time at the vacation home be scheduled? Often, summer months or school vacations can be particular popular times for its use. Will families stay together (space permitting) or will each sibling get a certain number of weeks? Is scheduling time first-come, first-served, rotational or do families “draw straws” for popular times? Will other family members or friends be allowed to use unused times?
- Can the home be rented to non-family members to help pay for the expenses? Are there tax, insurance, or liability implications in doing so?
- What if one sibling wants to sell or cannot afford to pay his or her share of the expenses? Can the others buy him or her out? Can one family member force the sale of the home? Keep in mind that family dynamics can change and life circumstances happen (job loss, divorce, death, disability, bankruptcy or even fights among relatives).
- What will happen in the case of a death of one of the family members? How will his or her share of the property be transferred? The share of the property could be transferred to the surviving spouse, grandchildren or split among the remaining siblings.
- Will the property arrangement (trust, LLC, joint ownership, etc.) provide any asset protection in case of financial problems or government benefits (such as disability or Medicaid)?
- Can the trust, LLC, joint ownership agreement be easily modified or terminated?
- If the property is sold, how will the contents of the home, watercraft and other equipment be divided? Often, there are sentimental items that have been in the family for years that may need to be addressed. Will the sale trigger any federal and state estate tax or capital gains tax implications?
If your dream is to keep your cherished vacation home in the family for years to come, consult with the attorneys at the Herzog Law Firm for a way to achieve that dream. There are many ways to structure the transfer of a home, but the time to plan is now. With New York offices in Albany, Saratoga Springs and Kingston, the Herzog Law Firm conveniently serves those in the Hudson Valley, Capital Region and Adirondacks. Contact us at 1-800-777-7581 to schedule a complimentary estate planning consultation. We look forward to working with you and your family for generations to come!