As an adult, you spend the first half of your life trying to achieve financial…
Many families enjoy spending time in their family vacation home. Sharing time and creating memories is the hallmark of such properties, and often there is a desire to preserve the home’s ownership within the family system for generations to come. Yet, even seemingly harmonious families can experience discord and exasperation when parents are no longer alive mediate conflicts. Creating a plan around your family vacation home can avoid later disputes and a potentially forced sale of a beloved property.
The Value of a Family Vacation Home
Statistics show that over eighty percent of vacation homes, cottages, and cabins are without mortgage debts and may sometimes represent a substantial asset within an owner’s estate. Some estate beneficiaries may prefer to access the cash value of their inheritance because they are putting children through college or have other financial needs to meet. Additionally, stepchildren or spouses who have weak emotional ties to the property’s memories may see no value in the property at all outside of its cash value.
Protect Your Vacation Home from Family Conflict
To avoid turmoil and preserve the property within the family system for continued generations, begin with a family conversation to gauge beneficiaries’ interest level. It may be devastating to learn that without you spearheading the family gatherings at the property, many of your children may not have the interest or the ability to use or maintain the home. If one or more inheritors choose to maintain the property and others do not, crafting your will or trust to balance assets of equal value to offset property ownership will help to prevent future conflict.
The key is to manage the expectations of all listed beneficiaries to avoid misunderstandings and miscommunication. Everyone wants to feel they are receiving some level of benefit based on their circumstances and expectations. Once you understand their interest levels in the property, begin the conversation about property taxes, unexpected repairs, maintenance, and mortgage responsibility, if applicable. Typically, your children will prefer to keep their financial discussions private so speak to them individually. Group settings rarely lead to positive outcomes regarding finances.
Create a Living Trust for Your Vacation Home
If you choose to support the vacation property with additional assets, it is best to create a living trust. It is likely the most beneficial to have the property itself pass in the trust as well. By doing so, the vacation property maintains protection against creditors and a more effortless manner to facilitate the costs of the home. Understand the change of income tax benefit as holding the property within a self-paying taxable trust may enable this deduction to continue. Before transferring your family vacation home to your heirs or placing it in a trust, ask these key questions:
- Do all heirs have an interest in owning the property?
- How often will each heirs’ families use said property, and are there vacation date conflicts?
- Do all heirs have the resources to assume the financial commitment of ownership?
- Do all heirs have a good and working relationship one to the other?
- Do all heirs feel that conflict resolution, particularly around the amount of use of the property and ability to cover costs, is possible?
Prepping for shared ownership may entail placing the property into a limited liability company (LLC) or family limited partnership (FLP). These entity structures serve as a convenient method to pay bills and maintain assets for future expenses. Additionally, these structures can protect the family’s other assets from liability exposure. An LLC, FLP, or living trust also eliminates the need for ancillary probate if your vacation home is in another state from where your primary residence is.
Using the Gifting Strategy for Your Vacation Home
You can pass your vacation home to your heirs as a lifetime gift, as part of your estate plan after your death, or as a future interest gift. A future interest gift (usually a Qualified Personal Residence Trust) works well when gifting real property like a vacation home. This approach provides unlimited use of the property for some time, lowers the amount a transfer would use regarding gift tax exemption, and eases concerns about your family member’s ability to cover the cost of the initial ownership.
A family vacation home creates wonderful times spent together, and the desire to keep it for generations is essential to some but not all family members. Assess your own goals for your inheritors and whether they have the desire and ability to handle the property, and then meet with an elder law attorney to execute your estate plan, including your vacation home. The effort you put into your plan now can preserve your vacation home within your family system and in the memories of future generations. Start planning today by contacting our Chicago legal office at (312) 641-9500.