Planning

Estate Planning: The Family Vacation Home – Albatross or Cherished Asset?

A primary or a secondary residence may be used by the family as a place to vacation.  It can be a home in the mountains, at the beach, or on a lake, where the family gathers to relax and enjoy togetherness.  The place is perfect, provided mom and dad pay the bills and control the availability of the property.

But what is one to do with this cherished property at death?   The residence may or may not be especially valuable in relation to your total net worth but can present the most conflict when left in one’s estate.  It is probably best to have an honest discussion with one’s heirs, perhaps separately, to best ascertain the level of interests the next generation has in owning and using the property.

I will not suggest there is an estate planning idea that will resolve all concerns and make for an entirely equitable distribution but there are ways to head off conflict prior to death that will hopefully keep families in a relative state of harmony.

If everyone agrees the property is something to be kept, then the next consideration is ownership.  The property can be transferred to individuals directly, to a limited liability company (LLC) or to a trust.

Outright transfers are easy and not costly but offer little or no creditor or liability protection.  With no governing document to resolve disputes, this is not the best option for multiple owners.  Additionally, owners could leave their interest to non-family members and could force the sale of the property under certain conditions.

LLCs provide the most flexibility and owners have limited personal liability. The LLC’s operating agreement provides clear rules for management and dispute resolution.  It could make sense to transfer the property to the LLC prior to death to ease all the family members into administration duties and to begin the transfer during one’s lifetime.  This structure also avoids ancillary probate if the property is outside the owner’s state of primary residence.

Trust ownership works well to layout a set of rules for beneficial interests and has fewer legal formalities than an LLC.  A third-party trustee can be named to serve as a disinterested party.  A trust is likely the best if the trust will also be funded with cash to cover the expenses of the property, like an endowment.   A trust fund could also be used in conjunction with an LLC to separate the management of the property and financial assets set aside for expenses and upkeep.

If a consensus to keep the property is not reached, then it is time to consider ways to equalize the estate so that some members of the family keep the home but those not interested are compensated fairly for their prospective share.  If there are sufficient assets in the estate, and the heirs opting to take the vacation home are on solid financial footing, then this is likely not at issue.  Even if there are not adequate funds to substitute, the heirs opting for the home could purchase the home from the estate.  In all cases, a qualified appraiser should provide a fair market value at time of transfer that would likely be discounted to account for a fractional interest.

Lastly, it could be that the family may agree the house is not something they would be interested in owning and maintaining after mom and dad are gone.  This too is okay and should be an acceptable outcome.  The memories live on and the home’s true value is represented by the family union that spans generations.

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