Estate Planning Considerations with Your Vacation Home
By: Robert Hodges
With Memorial Day in the rear-view mirror and the July 4th holiday quickly approaching, many of us are enjoying weekends or longer stays at a family vacation property on the water. The gathering spot may be known as a lake house, beach house, cabin, camp, cottage, lodge, or condo (depending on the location and use). In addition to waterfront residences, other families may have a warm-weather destination to escape the cold northern climate, or property with access to the ski slopes, sporting events, or outdoor activities. Regardless of the name and the specific use of the real estate, the family vacation property deserves special attention when crafting estate and succession plans. A succession plan without specific guidance regarding the future of the family vacation property is a plan waiting to fail. Further, undivided, direct ownership of real estate is a structure we generally avoid. Among the planning considerations we discuss with our clients relative to family vacation properties or second homes are:
- Who is likely to use the vacation property within the next generations? If no one has the ability or desire to use the vacation property after you are gone, a sale of the real estate is likely. Obviously, the nostalgia of family ownership is lost with a sale, but the headaches associated with remote ownership of real estate are also gone. The cash from the sale is easy to split up too.
- Do the kids and grandkids want to keep the property? These answers often shock clients. Some clients who think their children have no interest in the vacation property viscerally react at the prospect of the property ever being owned outside the family. Other clients who assume their kids would not sell the cabin for all the money in the world are surprised to learn the answer to the question. For example, a modern condo in Scottsdale may be more attractive to the next generation than a world-class view of a remote lake in northern Wisconsin. Ask. Always ask.
- If the kids and grandkids want to keep the vacation property, do all the children have (or will receive through inheritance) the financial resources to maintain the vacation property? If not, we may be creating a situation where one sibling is put out by providing more funds for the upkeep of the property.
- Do you care about ownership, access, or both? In some situations, one child uses the vacation property extensively while the other siblings because of location, time, interests, or other reasons only use the vacation property sparingly. If the relationship among the siblings is strong (and you make your non-binding wishes known), it may be enough for the client to transfer the vacation property to a single child with the understanding that the sibling is likely to allow some limited access to other members of the family. We, generally, however, prefer more structure than this arrangement.
- What about the situation where multiple family members desire routine access or family relationships that aren’t strong?
- If the family relationships are truly strained, co-owning property is typically a bad idea. In those situations, we often recommend a structured purchase option structure within the client’s estate planning documents. At the end of purchase option items, usually, a single descendant will own the vacation property, or it will be sold to a third party. Again, the cash proceeds from a sale are easy to split up. This process isn’t perfect as it favors those with resources to exercise the purchase options, but the structure compresses the potential conflict among family members into a narrow window and the purchase option can be a non-emotional math problem.
- In the situation where familial relationships are workable, we often recommend creating a limited liability company (“LLC”) or similar entity to hold the vacation property. The structure has immediate utility in creating a liability shield for the client and may also assist in avoiding an ancillary probate administration in another state. Another current benefit of the LLC-based succession strategy is ownership interests in the business entity can be freely transferred among the children and grandchildren as lifetime gifts. After the client’s passing, the governing documents of the entity provide the structure regarding use of the property, contributions for expenses, management, and similar items. Additionally, the buy/sell provisions of the governing documents allow for an orderly consolidation of ownership interests over the years as interests in the vacation property wax and wane. In essence, the client predetermines pricing mechanisms for sales, managerial concerns, and similar items that the kids “fall into” as they inherit the business interests.
Given all the joy, history, and one-of-a-kind experiences associated with vacation properties, an estate plan that doesn’t include special considerations for the vacation property is a disservice to all involved.