Approximately 7.5 million second homes are owned by families according to a study in 2018 by the National Association of Home Builders. For many families, these second homes are vacation homes that carry years of special family memories. Following are some important estate planning concerns to address in the care, management, maintenance, and transfer of these special family assets.
What Will Happen to the Property at Your Death?
The fate of your vacation property at your death depends on how it is currently owned and titled. If you are the property’s sole owner or if you own it as a tenant in common with one or more other people, you must decide what will happen to your interest in the property. If you own the property with another person as joint tenants with rights of survivorship, or with a spouse as tenants by the entirety, your interest will automatically transfer to the remaining owner without court involvement. If a trust or limited liability company owns your vacation property, the entity may continue to own the property after your death. The trust instrument or operating agreement may lay out additional instructions about what will happen at your death.
What Do You Want to Happen to the Property at Your Death?
The wonderful thing about proactively creating an estate plan is that you get to choose, in a legally binding way, what happens to your money and property. If you do not create a plan for your property and it is not owned in a way that automatically transfers to the next owner by operation of law, your state has decided for you. State laws of intestate succession determine who the next owners are and the probate process is necessary to complete that transfer. Probate is the court-supervised process that winds up your affairs and distributes your money and property to the appropriate people. In addition, if you own property in a different state from where you reside, probate may be necessary both where you resided at the time of your death and where your property was located.
There are several different options for handling your vacation property.
- Give the property outright to a loved one. You could just give the property outright to a family member, friend, someone who has expressed interest in continuing to use the property, or an individual with the financial means to maintain the property.
- Leave the property outright to a group of people. If your whole family enjoys gathering and using the property together now, you may wish for them to continue gathering at the vacation property after you pass away.
- Give the property to a group of people as tenants in common and create an ownership agreement. If two or more own together as tenants in common, an ownership agreement can lay out each one’s rights and responsibilities.
- Prior to your death, transfer the property to your revocable living trust to be held for some period of time or indefinitely. A trust can be the owner of the property. When you die, the beneficiaries will merely look to the trust to see what happens. There is no need for probate, and you can specify any rules you may have for the property and how it is to be held or distributed to one or more chosen beneficiaries. Some states may limit how long the trust can hold the property. If you want the trust to hold the property indefinitely, speak with us and we can show you how to accomplish this goal.
- Prior to your death, transfer the property to a special trust that owns only the property to be held for a long period of time or indefinitely. This option may be advisable if you want to separate one property from the rest of your money and so that it will be managed on its own or if you have asset protection concerns. This trust agreement would also lay out each beneficiary’s specific rights and responsibilities with respect to their use and enjoyment of the property.
- Prior to your death, transfer the property to a limited liability company to be held for a long period of time or indefinitely. Depending on your objectives for the property, transferring it to a limited liability company may provide the beneficiaries with some additional asset and liability protection. The entity’s operating agreement may also specify each company owner’s rights and responsibilities with respect to any company property.
- Instruct your trusted decision maker who will wind up your affairs to sell the property. If you believe that the money from the property’s sale would be of greater use to your beneficiaries or that none of them would want to buy the property, selling it can be an effective way to provide some money to benefit your loved ones differently.
Can Your Beneficiary Afford the Vacation Property?
While there may be a lot of happy memories associated with your vacation property, you know that there are also a lot of responsibilities. When you decide to leave your property outright to one or more people, the next owner(s) will become responsible for financial obligations such as mortgage payments (if any), utility bills, property insurance, and taxes. If you wish your beneficiary to keep the property, you need to consider whether they can meet the financial obligations. If not, they may end up prematurely selling it.
If More than One Person Will Have an Interest in the Property, Do They All Get Along?
All your children may get along now, but will they still be able to agree on things and work together when you are no longer living? Owning property together means that they need to be able to communicate, agree, and equally contribute to the property’s maintenance. A proper estate plan can address these potential issues by outlining:
- everyone’s responsibilities with respect to the property,
- everyone’s rights to the property,
- who makes the decisions,
- what to do if a dispute arises, and
- how someone can walk away from the property.
What Should You Do to Make Your Wish a Reality?
First, you need to create a legal plan that documents your wishes and ensures that your loved ones know what your wishes are, that they will be followed, and that all possible scenarios have been planned for. Second, if you have concerns about your beneficiaries being able to financially maintain the property, you need to design a plan that allows you to set aside money for its maintenance. Also, you need to meet with an insurance agent to make sure that the property is properly insured based on its intended use and to acquire additional life insurance in case you need another source of financial liquidity for its maintenance. Finally, you should meet with your tax adviser to make sure that you know of any potential tax consequences of transferring the vacation property, whether during your lifetime or at your death.
If you are interested in learning more about your options for protecting your vacation property and having your wishes for it carried out, please contact us.