Keeping the vacation home in the family is often a dream for the homeowner(s) and their children and grandchildren. If you are fortunate enough to have a vacation home, according to Beck & Lenox Estate Planning & Elder Law, LLC, make sure you take appropriate steps to protect it for future generations.
There are several ways to ensure that a vacation home 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. 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:
Named management—ideally, two or three people 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.
Property and ownership rules must be clarified and documented. 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.
Finances need to be spelled out 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 an LLC or Trust, they need to be sure it works with their estate plan. If they wish to leave a bequest for its maintenance, for instance, an estate planning attorney like the ones at Beck & Lenox will be able to incorporate that into the LLC or Trust.
Keeping the property in the family is a wonderful legacy to leave for future generations.
Reference: Pauls Valley Democrat (July 29, 2021) “Estate planning for vacation property”