23 Oct 7 Critical Considerations to Keep In Mind When Passing Down a Family Vacation Home
1. Who maintains it? A family vacation home is usually not occupied year-round and will require maintenance at times, including painting, appliance replacement, and roof repair. In the mountains or near water, condensation, severe weather, animals and pests can cause substantial damage. Break-ins can happen as well, especially if the property is unoccupied for large chunks of time. So when the cottage becomes property owned by you and your siblings, who will become responsible for the maintenance, and will the expenses equally shared? Too many times, this is not worked out by written agreement and situations arise where one sibling, who uses the home infrequently, will resent having to contribute to its upkeep.
2. Should we rent it out? Imagine a scenario where one sibling starts using the cottage for what looks like a primary residence. It happens more often than you might think. Or another scenario where one sibling wants to rent the home out to get a little income, but no one else wants strangers hanging out in a home they consider theirs. In the first situation, should that sibling be paying you and the other siblings rent? After all, he or she is enjoying the benefits of the home rent-free. If you want to stay for a weekend or more with your family, you have to share space with the brother or sister living there and not have the privacy you wanted. So far as renting it out, the county may have strict regulations about the home requiring upgrades that can cost thousands and take years to recoup. The IRS also has limits on what you can deduct if the home is a residence and you wish to rent. It is considered a residence if you live there for 17 days and rent it 160 days out of the year. These are considerations that your estate planning lawyer can discuss with you.
3. Who gets to use it when? Trying to figure out a fair way to divide up time for when you or your siblings or other family members can stay at the cottage can be difficult if done without some sort of agreement about who gets to make the decision and how. You do not want a situation where you and your three children arrive only to find your sister and her three children there.
4/ “Dude, can I just crash here for a couple of weeks while I look for a job?” It seems every family has someone who has not been particularly successful or who is experiencing certain hardships, such as alcohol or drug addiction. This individual, who is not contributing at all to the taxes or maintenance of the property, wants to stay for a week, which to you means a month or longer. This might be a scenario that neither you nor other family members envisaged but your little brother needs a place to stay for awhile. If you agree, then will all of you pay for the damage or mess he is bound to create, and who has to throw him out if he overstays his welcome?
5. Can sweat equity take the place of a monetary contribution? One family member decides a major clean-up is needed, including extensive yard work, fixing the roof, replacing the rugs and $500 in other cleaning. Now, that family member wants reimbursement even though you never agreed to it and may feel the clean-up was unnecessary, or the cost was exorbitant. Or, that family member decides that the effort he put into cleaning the cottage should be credited towards his share of the property taxes. He may have a point.
6. “I don’t want it.” Sister Marie wants no part of the cottage. Maybe she lives too far away from it for it be useful to her. Or maybe she and her husband have their own vacation property. Did your parents leave a buy-out plan when the cottage was passed down? Is the cottage owned by a trust or is it jointly owned? What if Marie wants to sell her share to someone outside of the family?
7. Who counts as family? A sibling passes away and the surviving spouse has inherited the decedent’s share. In some cases, the decedent family member neglected to change his will and left his share of the cottage to his now ex-spouse. A nasty fight ensues that costs you and your other siblings tens of thousands of dollars.
Plan Now for Family Vacation Home Succession
These scenarios and others can be a nightmare for what you thought would be a wonderful gift to you and other family members. But careful cottage succession planning can address these issues and be a guide for how to resolve others that were not foreseen.
For instance, consider buying a life insurance policy that can provide cash to be used pay off a sibling or others who do not want any part of the cottage or find it too inaccessible. If you just purchased a second home and have small children, purchase a permanent policy now since its costs will be locked in. The cost of such a policy can become prohibitive in your senior years.
Another plan is to establish a family trust if the home has considerable value. Otherwise, it may not be worth the cost and administration. The children can be the trustees and a third party could administer the trust. Alternatively, you could place the property in an entity typically used for business purposes, such as an LLC. The advantage of an LLC over a trust is that an LLC allows you to split “management duties” over a number of people and allows those people to operate within a framework of equality whereas a trust usually gives one person (the trustee) more power than others.
In any case, have a written agreement or require your children (if you are the one passing down the property) to draft one by including a clause in your will that ownership will transfer only upon execution of such an agreement. These agreements should address the following:
- Create an exit strategy for selling one’s share in the home. What are the conditions for a sale? How is the price determined and do the family members have the right to purchase it first? What about the right of partition if a co-owner wishes to physically divide the property?
- Allocate expenses. And remember that equal allocation isn’t necessarily fair. If one family member enjoys and uses the home more than others, maybe that person should contribute more it its maintenance and upkeep. Also, if a member is financially unable to pay his share, does he lose his ownership claim, and right to use the property, forever? Also, one member may have already made contributions during the life of the original owner that should be considered.
- List the management responsibilities and assign them to family members or hire a property management company. You can have a system for changing the responsibilities on a periodic basis.
- Prepare an annual budget so that each owner contributes his or her share. It may have to be estimated, but don’t forget to include reserves for major repairs or unexpected disasters from weather, break-ins, or other surprises. Don’t overlook the inevitable need to replace the roof and appliances, and paint.
- Have a formal meeting and agenda process. Create a process for discussing disputes, usage, expenses, and failures to perform obligations, and write down the resolutions for everyone to follow.
- Create a procedure for determining who gets to use it when. This might depend on who is making the greater financial contributions so that whoever is using it the most has to make more financial contributions.
- Construction management. If a family member wants to do some or all of the needed construction, consider the time period, scope of work, compensation and quality of work.
- Have a buy-out provision so that the rights of the inheriting owner are considered with the present co-owners. Can surviving members buy out the inheritor?
- Consider re-titling the property if your estate planning lawyer advises it. How the property is owned bears upon numerous family ownership issues such as liability, creditor protection, dispute resolution and taxes.
Lastly, retain a competent and veteran vacation home succession planning lawyer. Dan McKenzie is a Denver estate planning lawyer with decades of experience in handling vacation home succession issues among others. Contact his office today to discuss this and all of your estate planning concerns.