When people own something of sentimental value, they are sometimes unsure of how to pass it along to their heirs. This can happen with a vacation home — especially if the place has been in the family for years.
Example: You have owned a beach vacation home for years in a sought-after area. You have seen your four children grow up there and even watched some of your grandchildren enjoying the place. You can vividly recall watching sunsets over the water, building sand castles, roasting marshmallows over a campfire and teaching the kids how to water ski. Now, there are great-grandchildren on the way. It may be difficult to think that this home will be sold out of the family when you die.
The question is: How can you keep it in the family so the next generation — and maybe future generations — can continue enjoying it.
Your children all used the beach home while growing up. As adults, only two of the siblings use it on a regular basis and one only visits once in a while. Your fourth child never comes to the home because he lives far away and it is inconvenient for him to travel. One sibling takes care of all the maintenance and spends entire summers there.
If you leave the house as part of your estate and divide it among the children, the risk is that some or the majority of siblings may want to sell it. Some of your children may not want to pay to maintain an asset they rarely use.
To alleviate this concern there are a number of options you can consider.
Transferring a Vacation Home
You can can bequest the house to one of the children upon your death. You could also transfer the house during your lifetime to one or more of the children, taking into consideration any tax issues of transferring the property as a gift versus as a bequest.
If the vacation home is worth a substantial amount of money and was paid off decades ago, the parent may want to “compensate” the other children. The parent may bequest nothing or nothing else to the child who receives the home, explaining the reasoning to the children of how and why the parent transferred the home to one child and how the parent plans to even out the distribution among the other children.
Yet, possibly you want all your adult children (and their children) to have the ability to use the vacation home upon your death.
Various legal structures that might work for your family include:
- An irrevocable trust. You (the grantor) set up a trust and appoint a trustee to carry out your wishes. Your children (and possibly grandchildren) play a fairly passive role. Decisions about the property come from you. The trust would have to be funded with enough assets to pay expenses.
With a Qualified Personal Residence Trust (QPRT), you retain the right to live in the home for a period of time and at the end of the trust term, the children will own the home. For federal gift tax purposes, a QPRT allows the transfer of the home at a discounted value. Your attorney and tax advisor can explain if this is a beneficial option in your situation.
- An LLC, which is more of a joint, democratic process. The LLC can own the home and either be managed by members (your children) or a manager. You can transfer member interests in the LLC and use your annual federal gift tax exclusions. You can continue doing this for years. The rights and responsibilities of the members are spelled out in the LLC operating agreement and the members have a say in decisions.
- Co-ownership. Ownership among family members could include being tenants in common or joint tenants with rights of survivorship. (There may be other options depending on your state.)
14 Questions to Answer
Here are just some of the questions that families should answer when deciding on a structure for transferring a vacation home to future generations:
1. Do family members get along and want to keep the home in the family? Make sure that your children have the same emotional ties to the home that you have.
2. How should siblings pay for regular maintenance and expenses of the property? Should there be a property manager or will each person pitch in to help with routine and emergency repairs, cleaning, yard work, etc.? What about real estate taxes, insurance and utilities?
3. How will disputes be handled if family members don’t contribute as agreed upon? What if one family causes major damage to the property?
4. Will disputes be required to be handled with arbitration?
5. What are the tax implications?
6. What about remodeling or improving the home?
7. How will time at the vacation home be scheduled? Will families stay together (space permitting) or will each sibling get a certain number of weeks?
8. Can the home be rented to non-family members to help pay for the expenses?
9. What if one sibling wants to sell? Can the others buy him or her out? Can one family member force the sale of the home? Keep in mind that family dynamics can change due to a job loss, death, bankruptcy or even fights among relatives.
10. What will happen in the case of a divorce of one of the family members?
11. If the home is transferred after death, what are the federal and state estate tax implications?
12. Will the arrangement (trust, LLC, joint ownership, etc.) provide protection from creditors if one family member experiences financial problems?
13. Can the trust, LLC, joint ownership agreement be easily modified or terminated?
14. If the house is sold, how will the contents of the home be divided? Often, there are sentimental items that have been in the family for years that may need to be addressed.
Any structure for a vacation property should account for the possibility that eventually the family may no longer want to own the property. Some family members may move far away, grow old or simply no longer enjoy the place. Perhaps the younger generation is no longer interested. The ownership arrangement you decide on should provide a way for family members to sell.
If your dream is to keep your cherished vacation home in the family for years to come, consult with your attorney for a way to achieve that dream. There are many ways to structure the transfer of a home. This article only covers the basics. Consult with your attorney and tax advisor. The best plan for you depends on the unique dynamics of your family.