A vacation home can be challenging to bequeath.
Families often make and retain fond memories from vacations.
For those who own a vacation home, these memories are often overwhelming tied to a specific location.
After all: location, location, location.
While vacation homes bring joy in life, they can bring complications when the owner dies.
According to a recent Kiplinger article titled “Your Vacation Home Needs and Estate Plan!,” estate planning for a vacation home should be tailored to each specific family dynamic.
Not all families will have the same feelings or expectations around the property.
Some heirs may want to keep it in the family.
Others may see the property as a burden.
Like a primary residence, the vacation home will require insurance, care, and maintenance.
Those who inherit must understand the responsibilities and be able to afford the time and money required to maintain the home.
If your family members are in agreement in their desire to keep the vacation home, then there are several options for accomplishing this.
An outright bequest.
If you choose to transfer the property directly to your heirs, simply retitling the deed can accomplish this.
Over and done, right?
Although this can be accomplished via provisions in your last will and trust, revocable living trust, or (if your state law permits it) via a beneficiary deed, this method can lead to problems in the future.
Equal ownership among your children could trigger arguments about the management and use of the vacation home.
This is especially problematic if your children do not function well as a team.
Even if your children get along, their spouses may bring a clash of personalities.
To minimize these conflicts, your children could have a Use and Maintenance Agreement created to outline rules and terms for the use of the home.
Although this may solve arguments, other problems may still arise from an outright transfer of the vacation home title.
If each child has an equal share in the property, each shareholder may sell his or her interest at any time or bequeath the portion to his or her own children.
Additionally, the property may become embroiled in a divorce should one of your children “split the sheets” with his or her spouse.
This means a former in-law could also end up owning a share in the home.
This can be more than awkward for all involved.
A Limited Liability Company, or LLC.
As a formalized agreement, the LLC can provide greater controller over the property.
Within the LLC, one can designate guidelines of management and use of the vacation home.
Does the owner lose control when the property is placed in an LLC?
The owner can choose to give all the interests away over time or immediately.
In some instances, an estate planning attorney may advise the gradual transfer using the annual exclusion amount as a guide to maximize tax benefits.
Presently, you and your spouse can each gift $16,000 without gift taxes to each of your children.
Certain states may allow you to restrict ownership of LLC shares to those who are direct descendants.
This means you could protect the home from folks who are not in your bloodline.
If your heirs want to use the vacation home as a rental property, an LLC can provide greater protections and allow profits to offset expenses to aid in the upkeep of the property.
Trusts are commonly used estate planning tools as they allow for greater privacy and control over assets than a last will and testament provides, in addition to avoiding probate.
What type of trust options might be available for your vacation home?
The first is an irrevocable trust.
As commonly used, with this approach you gift the vacation home to the trust you create with your children beneficiaries.
Provisions of the trust govern how the trust manages the vacation home as well as shield the property from creditors.
With a revocable living trust, your children only inherit the vacation home at the death of the surviving spouse.
As with the irrevocable trust, the inheritance trust provisions then manage the vacation home and shield it from creditors.
With either trust approach, provisions can be made regarding guidelines for selling the vacation home.
Alternatively, you can gift the vacation to your loved ones at a lower value with a qualified personal residence trust (QPRT).
The property can be used by your heirs for a set term.
After the term ends, the property can be distributed outright to your children or continue in trust for them (and their descendants).
As you can see, there are a number of options available for transferring a vacation home.
This post has barely scratched the surface and you should consult with an experienced estate planning attorney before taking action.
Measure twice and cut once, yes?
Reference: Kiplinger (Feb. 1, 2022) “Your Vacation Home Needs and Estate Plan!”