How to Keep the Vacation Home in the Family
There are several ways to protect a vacation home so it remains in the family and is not overly burdensome to any one member or couple in the family, according to the article “Estate planning for vacation property” from Pauls Valley Daily Democrat.
To begin, families have the option of creating a legal entity to own the asset. This can be a Family LLC, a partnership or a trust. (Keep in mind, that these options will also help you to avoid your and your spouse’s estate from going through a second probate if the vacation home is in another state, such as Mississippi or Florida). The best choice depends upon each family’s unique situation. For an LLC, there needs to be an operating agreement, which details management and administration, conflict resolution, property maintenance and financial matters. The agreement needs to include:
Vacation Home Named management—ideally, two or three people family members who are directly responsible for managing the LLC. This typically includes the parents or grandparents who set up the LLC or Trust. However, it should also include representatives from different branches in the family.
Vacation Home Property and ownership rules must be clarified and documented for the family. The property’s use and rules for transferring property are a key part of the agreement. Does a buy-sell agreement work to give owners the right to opt out of owning the property? What would that look like: how can the family member sell, who can she sell to and how is the value established? Should there be a first-right-of refusal put into place? In these situations, a transfer to anyone who is not a blood descendent may require a vote with a unanimous tally.
There are families where transferring ownership is only permitted to lineal descendants and not to the families of spouses who marry into the family.
Vacation Home Finances need to be spelled out for the family as well. A special endowment can be included as part of the LLC or as a separate trust, so that money or investments are set aside to pay taxes, upkeep, insurance and future capital requirements. Anyone who has ever owned a house knows there are always capital requirements, from replacing an ancient heating system to fixing a roof after decades of a heavy snow load.
If the endowment is not enough to cover costs, create an agreement for annual contributions by family members. Each family will need to determine who should contribute what. Some set this by earnings, others by how much the property is used. What happens if someone fails to pay their share?
Managing use of the property when there is a legal entity in place is more than a casual “Who calls Mom and Dad first.” The parents who establish the LLC or Trust may reserve lifetime use for themselves. The managers should establish rules for scheduling.
For parents or grandparents who create a vacation home for the family in an LLC or Trust, be sure it works with your estate plan. If they intend to keep the property in the family and wish to leave a bequest for its maintenance, for instance, the estate planning attorney will be able to incorporate that into the LLC or Trust.
Reference: Pauls Valley Democrat (July 29, 2021) “Estate planning for vacation property”
You may also like these articles that can also impact vacation homes in the context of estate planning: Taxes Due When Children Inherit A Home and Does Your Estate Have to Go Through Probate? And you can read these other blog artiels addressing other estate planning topics: How Do I Hire an Elder Law Attorney? and What Is Income in Respect of a Decedent?