Avoiding Vacation Home Havoc

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• Talk to Your Kids, Have a Plan
• Methods of Transfer

With the aging baby boomer generation, more families will be facing decisions about what to do with family vacation property. You may have a cottage, wilderness retreat or beachfront condo that’s been the family getaway for relaxation and wreak holiday havoc dating back to your children’s earliest memories (or possibly even your own). Now, you’re wondering how you can protect this asset for future generations, keeping things fair and harmonious between your loved ones.

Talk to Your Kids, Have a Plan

A starting point for planning what to do with a family vacation property is exploring with your adult children what they want. They might gladly accept additional costs and responsibilities in keeping it going. Even so, disputes can arise where obligations are not perceived as equal, or where one family member has more regular access than another. There may be one or more siblings who is in need of the cash value of the home, while one or more siblings wants to keep it and has the resources to do so. For many people, a vacation home is the largest asset in their estate, meaning that keeping the property leaves limited alternatives to an heir who would rather cash out their share.

How can you help ensure that your legacy is positive for your kids and their kids? Estate planning attorneys emphasize that passing on the vacation home is as much about how it will be managed as it is about the form of transfer. Issues that can impact whether the family cottage can be retained by the next generation (and the one after that) include:

• Is there a mortgage on the property, or is it owned free and clear?

• What are the adult children’s economic circumstances, relative to each other and relative to the cabin expenses?

• Are there funds in the estate to provide for payment of taxes and upkeep, or will your heirs be taking this over?

• How will decisions be made regarding scheduling, use, repairs, paying bills, etc.?

• Under what circumstances may the property be sold, or ownership transferred, and how is that decision to be made?

• What would happen in the case of a family member’s divorce, disability, bankruptcy or death?

• How will disputes be resolved and enforced?

The best thing you can do for your heirs is to establish a plan and address problems before they arise. Working with an advisor can help make sure you explore your options and give you peace of mind.

Methods of Transfer

Options for transferring vacation home ownership include:

Direct Transfer: The easiest and least costly way to transfer ownership is to draft and record a deed changing title to the property. This method also provides the fewest protections against creditors, in the event of a divorce, or if one owner wants to sell their share. There may be tax advantages or disadvantages, depending on your family’s circumstances. If you choose to transfer directly, you‘ll still need to work with your family on a co-ownership agreement for how issues will be addressed, should they arise.

Trust: The cottage is placed in a trust, ownership transferred to a trustee, and heirs receive shares in the trust (as trust beneficiaries). This form of transfer can protect the property from an individual owner’s creditors, and a divorcing spouse holds no marital interest. Shares may be passed on at the death of a sibling to their heirs. The trust will contain rules governing the property’s management, use, buyout or sale, and allows for management duties to be carried out by the designated trustee rather than beneficiaries. A downside to a trust is that it can be inflexible to changes over time, and that in order to maintain credit protection, there must be adequate funding within the trust.

LLC/LLP: A limited liability corporation (LLC) or limited liability partnership (LLP) plan provides for the creation of a business entity, which holds title to the property, and heirs own shares in the business, rather than real property interests. Advantages to this type of transfer are many, including the ability to incorporate rules and obligations in the governing operating agreement, maximum functionality to make future changes, as well as some liability and creditor protection. The primary disadvantage is the expense of setting it up, as well as the ongoing legal and formal requirements, such as filing annual statements and tax returns.

Will or Intestate Succession—The default means of passing on your cherished vacation home is likely to be the least advantageous for your family. If you fail to plan ahead, it’s likely that your heirs will encounter expenses of probate (including a separate process from the rest of your estate if your property is in another state), and the beach house may end up going to someone other than whom you intended.

Any transfer of a property interest will have tax implications, for both transferor and transferee. Be sure to consult with an attorney or tax advisor prior to completing any cabin transfer plan to verify that considerations are assessed based on your and your heirs’ circumstances. Because the issues surrounding transfer of a family vacation home to the next generation are complex, it’s important to get advice regarding your unique situation and preferences. Talk to an experienced estate planning attorney who has worked with families on vacation home plans and pricing.

For more information on this area of law, see our overviews of estate planning, wills, trusts, and probate and estate administration.