Vacations are often an integral part of a family’s collective identity and experience. As a result, our clients frequently ask for more specialized treatment of the family vacation home in their estate plan. They envision their children, grandchildren, and even great-grandchildren returning year after to year to the same property for decades to come.
That kind of continuity can be powerful and comforting, but as times goes on and the family expands, the management of this type of asset often becomes a challenge without specific planning techniques to resolve potential problems. The major obstacles in the family’s ownership of a vacation home after your death are apportioning costs associated with the property and creating a system to determine who will have the right to access the property at any given time.
Clients often theorize that the costs of maintaining the family cottage will be split evenly among the oldest generation, which sounds simple and straightforward. In reality, our lives are rarely this predictable, and there may come a time when one or more siblings will be unable or unwilling to contribute their share of the costs. This can be the result of unexpected illness or unemployment leading to financial stress, but it may also be the case that one of the siblings is no longer interested in using the family cottage and prefers not to continue contributing to the costs.
Similarly, co-owners of vacation property may have trouble coming to a consensus about when each of them should have access to it. Wherever the family cottage is located, there is likely to be a ‘peak season’ when access is the most desirable. Families may also have limited availability, because school breaks for children often overlap and adults might have inflexible options for taking time away from work.
There are planning options that may overcome these hurdles, but we encourage you to first talk to your adult children and gauge their level of interest in the family cottage. If only one child is interested (or has the means to maintain it), you can simplify your estate planning approach by leaving the property to the interested child and making up for the value using other assets that pass to the children who are not interested. If none of your children want to take on the property, it is unwise to employ planning techniques that attempt to force it upon them. Even “locked” in a trust, the children could petition a court to allow the property to be sold, and if forced to retain a property none of them want, they are likely to allow it to fall into disrepair, thus losing value.
If your children agree that the family cottage should remain accessible by all of them, there are several approaches that can minimize conflict. Leaving real property outright to multiple people may not be the best strategy, because when co-owners of real estate cannot agree about costs or access, their only recourse is to file a “partition suit” with the court, requesting that the court force the sale of the property and division of the proceeds. Disagreements of this kind, without a plan in place to address them, can lead to family estrangement – the exact opposite of what retaining the family cottage is meant to accomplish. Another problem with this approach is that any creditors of one of the children (including ex-spouses) could attach his or her interest in the property to satisfy the child’s debt.
One better possibility is to form a limited liability company (or “LLC”) to own the property and leave your children membership interests in the LLC instead of ownership interests in the real property. The terms of the LLC’s operating agreement could allow your children to buy each other out if one of them is unable or unwilling to continue contributing to the costs. This type of entity also provides some creditor protection, as well as liability protection if the family intends to rent the property out during periods when it would otherwise be vacant in order to offset maintenance costs.
Another option is to hold the family cottage in a trust that has specific terms spelling out the rights and obligations of the beneficiaries and setting conditions or a certain time when the trust terminates. If there are concerns about cost-sharing, one possibility is to fund the trust with liquid assets (such as marketable securities) as well as the real property and directing the trustee to pay the maintenance expenses from the liquid assets. If the trust is drafted properly, creditors of the beneficiaries of the trust would be unable to access the assets.
If you are an owner of a beloved family vacation home and have wrestled with how to transition ownership to your children at your death, give us a call. We can talk you through the options and come to the best solution for your family’s circumstances.