Passing on Your Family Vacation Home: Considerations for Keeping It, and How To Do So
November 08, 2021
By Paul Bleeg
Keeping a beloved vacation home in the family for generations to follow is a common desire of many families that are fortunate to have that cabin on the lake, beach or mountains where their kids learned to fish, surf or ski. Often it is a very significant asset of the parents; when that is the case, it is harder to make this desire a reality where there may not be an availability of funds to facilitate future maintenance and repairs.
The first issue to consider before getting to the best way to structure the transfer is whether the family vacation home should be passed down to future generations. More often than not, the sentiments of the parents are the driving force for wanting the home to remain in the family, rather than the wishes of the children. Sometimes these best laid plans unravel quickly after the parents die, as fighting erupts among siblings over matters that the parents used to decide. While not a comprehensive list, here are some things to consider before proceeding with the transfer:
- How will the family handle the ongoing expenses of upkeep? Some family members may not have the funds to share.
- Some family members may have little or no interest in the home; others may use it frequently, or even attempt to live there.
- If the home is left to the children, how is it protected from liability claims brought against any of the children; will their share of the home be subject to creditor’s claims?
- Is the asset protected from the right to partition, where an owner can ask that he or she be bought out by the others, or cause the land to be portioned in part to fund the buy-out?
- Will those managing the property be compensated for their time and aggravation?
- Is the property being transferred a jewel of an asset or a white elephant that will cause division among the children? Are they able to work together?
- What will be the interest level of the children as they marry, move away, or other circumstances change?
- What will happen to an owner’s interest in the case of divorce?
Having considered as many pitfalls as possible and deciding to proceed with an implementation plan anyway, there are three common ways of transferring a home to future generations.
- Make a lifetime gift, or transfer the property upon death, to your children each as tenants in common,
- Transferring the property in a partnership or limited liability company (LLC), or
- Transferring the property into a trust.
Making a lifetime gift, or transferring the property upon death, to your children as tenants in common is usually what occurs when there has been no planning, and this is the least successful means of achieving the goal of keeping the property in the family and achieving harmony. Each owner can sell their interest to a stranger, encumber their interest with debts, and subject their interest to liability claims, and there is no structure at all for resolving issues regarding the property that now has several owners.
Transferring the property in a partnership or LLC allows for a structure with the following features:
- the ability to hold partners accountable for capital raises for needed repairs,
- the ability to remove partners for cause,
- the ability to set the price for those wanting to sell their interest,
- An unlimited life, and
- governance and voting provisions
Many people choose this route because, unlike trusts, a partnership or LLC can go on for an indefinite period. However, an LLC interest is an asset that is subject to the claims of creditors in a lawsuit or bankruptcy, and it is an asset that can be sold if there are no buy/sell restrictions. It is also an asset that can be transferred to a spouse in a divorce settlement.
Transferring the property into a trust, if/when properly structured, can sometimes be the best vehicle for holding a family vacation home. A trust can be structured with the following features:
a) Protection from the beneficiaries; they may not have the right to any distributions, or claim on the assets of the trust other than the use of the property, as provided for by the trustees. So no one can demand they be paid in lieu of using the house.
b) Management by trustee committee that is entrusted to preserve the family vacation home and provide for its maintenance and management.
c) Protection from the creditors of the trustees and beneficiaries. The trust may be drafted with asset protection in mind so that it cannot be subject to the claims of creditors of individual family members
d) Removal of the value from the children’s estate tax returns. The trust is a completed transfer from the parents either during their lives or upon their death; the value of the property is not subject to estate tax on the deaths of the children.