Your Vacation Home Needs an Estate Plan!
There are several ways to pass on a vacation home down to your loved ones, and they all come with some pros and cons to consider.
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Do you have a treasured second home, summer property or another vacation residence that your family enjoys? Have you thought about what happens to this beloved property when you die? If you do not plan appropriately and thoughtfully, problems may arise with respect to this property and your family when you are gone.
Problems are almost unavoidable when emotional attachment mixes with family relationships. Planning can help avoid expensive and stressful issues.
Talking to your spouse and children is a good initial step to help determine interest in retaining the property for the next generation and financial ability to maintain it. Here are three ways you can plan for your vacation home.
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Leave a Vacation Home to Children Outright During Life or at Death
An outright transfer of the home via a deed to children is the simplest structure for giving away a vacation home. However, if your children all own the property equally, they all have equal say regarding the use and management of the property. All decisions require unanimous agreement, which can prove challenging and be ripe for disagreement.
The children could choose to create a Use and Maintenance Agreement, for instance, to determine the terms and rules for the property usage. Again, this contract would require all children to agree.
In addition, when each child has their own individual interest in the property, each child can leave it however they choose at death (or even give it away during life), which can further divide property interests and quickly become messy. An unhappy child could force a sale of the entire property by seeking to partition the property in court, resulting in expensive and divisive litigation.
Form a Limited Liability Company (LLC)
An LLC is a tool often used by families where each family member has a certain amount of membership interests in a home or to give away a home in a controlled manner. The LLC operating agreement lays out rules for governing the use and management of the property. In addition, the LLC can be modified over time, should circumstances change.
The initial owner of the property can put the home in the LLC. Then the owner can give away interests in the LLC all at once or over a period of years (using the annual exclusion amount, currently $16,000 per recipient). The LLC operating agreement can also outline restrictions on transferability, to make sure unapproved persons do not end up as owners.
Finally, the LLC is a great option for a rental property. A properly used LLC can help limit liability. Profits could offset expenses and could be used to help maintain the property in the long term.
Put the Vacation Home in a Trust
Trusts are another vehicle to help with the ownership and transfer of vacation homes. Different trust structures exist for this purpose, including:
- Irrevocable Trust: Property can be transferred into an irrevocable trust created for this purpose. This type of trust would be used to give away the property during your life. Your children could be the beneficiaries of the trust. And the terms of the trust would describe the use and management of the vacation home. This option also can provide creditor protection for the children.
- Revocable Trust: A revocable trust can be created to give away the property at your death. The trust can carve out what is known as a subtrust (or specific section of the trust) to manage the vacation home after you are gone. The subtrust would contain terms to manage the property, including laying out rules regarding when and who decides if and when the property should be sold. A sum of money should be added to the subtrust to help pay for the house for a period of time.
- Qualified Personal Residence Trust: This is an option for parents to gift the vacation home for a reduced value, while at the same time allowing the parents to use the property for a term of years, and after that period, the home is either left outright to the kids or is held in trust for the next generation.
Conclusion
Planning for your family’s vacation property is important to help avoid litigation and maintain family harmony. Addressing how the property will be paid for, and setting aside money for it, as well as selecting the right structure for your family to use and enjoy the property will no doubt help avoid problems down the road.
An experienced estate planner can help you explore your options and determine what works best for you and your family.
Tracy A. Craig is a partner and chair of Seder & Chandler's Trusts and Estates Group. She focuses her practice on estate planning, estate administration, prenuptial agreements, guardianships and conservatorships, elder law and charitable giving. She works with individuals in all areas of estate and gift tax planning, from testamentary estate planning and business succession planning to sophisticated lifetime leveraged gifting techniques, such as grantor retained annuity trusts (GRATs), intentionally defective grantor trusts, family limited liability companies and qualified personal residence trusts (QPRTs). Tracy serves in various fiduciary capacities, including trustee and personal representative (formerly known as executor). She also works with clients on issues facing elders.
Emily Parker Beekman is a Wealth Planning Advisor at CI Eaton Private Wealth in Boston. She works with clients and their advisors to develop and implement their estate planning, wealth transfer and charitable planning strategies. Prior to entering the wealth management field, Emily spent 10 years as a practicing trusts and estates attorney, where she assisted clients and generations of families regarding estate planning, estate and gift taxes, probate law, probate avoidance, estate and trust administration, philanthropy and specialized in estate planning for disabled persons, guardianship and conservatorship matters and long-term-care planning and other elder law matters.
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