Now that summer is upon us, many people are enjoying their lake houses, family cottages, or cabins in the woods. These vacation homes sometimes have been in the family for multiple generations. Proper planning can ensure that your family continues to enjoy your vacation spot for many years to come.
Once a vacation home passes to the next generation, difficulties can arise with the challenges of sharing expenses and time at the property. In order to avoid such problems, consider this simple three point plan.
Step #1 – Convene a Family Meeting
The first step to putting together a succession plan is to gather information from your family regarding their wishes for the property. An excellent time to do this would be during a summer gathering of the family or maybe later in the year during the winter holidays.
That meeting should include an honest discussion of the costs associated with maintaining a vacation home. Although your children all might wish to continue to own the property after you pass away, they might not understand the expenses that need to be paid on a regular basis.
Property taxes alone on a vacation home worth $300,000 can easily run $9,000/year or $750/month. In addition, there are the costs of insurance, maintenance, and capital improvements. Often vacation homes come with an array of “toys”, such as boats, jet skis, and other implements of summer fun. Unfortunately, all such amusements come at a price.
A frank discussion of these costs may cool the enthusiasm for keeping the vacation home, especially if your children are saving for college expenses or their own retirement. Family budgets can only stretch so far, however, if there are still family members interested in keeping the property – it’s time to move to Step #2.
Step #2 – Consider Your Legal Options
Assuming there are family members interested in keeping the vacation home, you can consider your legal options for transferring ownership. The basic options for transferring the property after you pass are by Will or by Trust. Whether you use a Will or Trust will depend on a variety of factors that go beyond the issues related to the home itself. Another option would be to not wait until you pass, but to transfer the property while you are still living.
Transfers while you are still living are known as “inter vivos” transfers, and include options such as an outright transfer of the property by deed or a deed subject to a reserved life estate interest. The life estate allows you to continue to control the property while living, but upon your death, the property is automatically owned by your family.
An interesting option sometimes utilized with vacation homes is to transfer the home first into a limited liability company (LLC). The operation of the LLC is governed by its Operating Agreement, which sets forth the rules regarding the management of the LLC’s assets. Once the LLC owns the vacation home, LLC membership units can be transferred to family members after your passing or pursuant to an inter vivos transfer.
Step #3 – Make a Plan for Your Vacation Home
After you have had your family meeting and considered your options, it’s time to put a plan in place.
Assuming you have family members interested in receiving your vacation home, you need to decide whether to transfer the property to them now or to wait to transfer it until after your passing. Generally, most people would like to continue ownership of the property until they pass away, but you may decide there are good reasons to transfer the property while you are still living. For example, an inter vivos transfer more than five years before you enter a nursing home would potentially make the vacation home an asset that would not be considered when determining your eligibility for Medicaid.
Regardless of whether you transfer the vacation home now or later, serious consideration should be given to the option of placing it in an LLC first. At the planning stage, you can consider what types of rules would be useful to have in an Operating Agreement. Such rules could include how many weeks each owner gets to use the property, a formula for the sharing of property expenses, and rules for how an owner could sell their interest. With some foresight and planning, you could potentially minimize future disputes by establishing clear, manageable rules for everyone to live by.
Step #1 of this process can be handled within the family, but Steps #2 and #3 should be taken with the guidance of an experienced estate planning attorney. Thoughtful planning now can ensure your vacation home stays happily in your family for many years to come.
Matthew J. Dorsey, Esq. is a Partner with O’Connell and Aronowitz, 1 Court Street, Saratoga Springs, NY. Over his twenty years of practice, he has focused in the areas of elder law, estate planning, and estate administration. Mr. Dorsey can be reached at 518-584-5205, This email address is being protected from spambots. You need JavaScript enabled to view it., and www.oalaw.com.
