A family might spend decades working and saving towards the goal of owning a vacation home. The memories made at that beachfront condo or cabin in the woods could be priceless. But the personal, emotional, and financial costs of keeping that house in your family for generations can be very high and very painful without thorough planning.
As you prepare to incorporate a family retreat into your legacy plan, make sure you discuss these three points with your heirs, your attorney, your CPA, and your financial advisor.
1. What will be the ownership structure?
The simplest solution -- passing your vacation home down to one child whom you trust to manage and share the property responsibly -- might not be the best solution for most families. If the beneficiary is an only child, a host of legal and fiscal responsibilities will fall on him or her alone. And if you intend for siblings, cousins, and older relatives to keep enjoying the property, they might feel excluded and resentful. Add in the value of the house and those feelings could snowball from hurt to litigious.
In addition to splitting ownership percentages between multiple heirs, you and your team of professional advisors should consider forming a trust or limited liability company (LLC) that will formally own and manage the property. These vehicles might be able to reduce the tax burden on individual heirs. And, with proper planning and accounting, some of the maintenance costs associated with keeping up your vacation house could be tax deductible. Your heirs might even be able to earn some passive income by renting the house when it's not in use.
2. Who will be responsible for what?
No matter how you decide to structure ownership of your family retreat, your heirs will be responsible for some out-of-pocket expenses and household upkeep.
So:
Who's on the hook if a leaky boiler needs replacing?
Will the owners be prepared for capital gains taxes upon inheritance and property taxes for as long as they maintain ownership?
What happens if two owners want to pay for a remodel but the third doesn't?
Are the inheritors going to share a chore calendar? Or is one of the inheritors going to cut the lawn and handle minor repairs? Will they be compensated by the other owners?
Who's in charge of managing bookings? What happens if two sides of the family want alone time on the same weekend?
If you don't trust your heirs to make amicable arrangements for these kinds of details, that's all the more reason to consider alternative ownership structures. You don't just want your family to inherit your vacation house, you want them to be good stewards so their kids will inherit it someday as well. As part of a trust or LLC, you might establish a maintenance fund that owners need to buy into every year. You could also set guidelines for sharing the property and managing potential repairs and renovations.
3. How do we settle disagreements and plan for the future?
Even the most loving families disagree from time to time. And after you're gone, the emotional connection that your heirs feel to your vacation home will only grow.
Use your legacy plan to get ahead of potential disputes. Create a meeting calendar so that owners have a regular forum for discussing issues. Institute a binding voting structure that includes a tie-breaking procedure. Designate a legal, impartial, third-party arbitrator to whom owners should turn if they can't settle a dispute. And establish guidelines for heirs who want to sell their ownership stakes rather than pass them on.
You're under no obligation to share your financial plans with your heirs. But involving them in certain legacy decisions might reduce the stress and hassle around transferring assets like a family retreat. We’d be happy to facilitate a family meeting and help you make a plan that preserves your wishes, your values, and your wealth for generations to come.
