Friday, June 4, 2010

Estate Planning For A Vacation Home

With summer’s arrival, many families are planning gatherings at the family vacation home, whether it’s on a lake, in the mountains, at the shore, or at points in between.

While mom and dad are around, they will be the final arbiters regarding use of the vacation home by the children and other family members. Essentially, the parents serve as the “glue” that keeps the peace among potentially fractious children (not to mention their spouses).

But what happens after the parents are gone? If the parents hope that the vacation home will remain “in the family” for future generations, then the typical “simple” will that leaves that property equally to the children after both parents’ deaths is likely not the answer. Many times the children will find themselves in different economic and geographic situations. Suppose one child lives 50 miles from the vacation home, while another child lives 500 miles away. It is likely that the more distantly located child will have less opportunity to use the vacation home. Perhaps that child says to his siblings, “well, I’m not using it anyway, and I can’t afford the property taxes -- let’s just sell the place.” If the other children want to keep the home, but the reluctant child doesn’t contribute for taxes or other expenses, friction between the siblings is almost a certainty.

The situation gets even murkier if the property passes to the succeeding generations. What if child #1 has three children and child #2 has only one child? As title to the property passes to the grandchildren, the three children of child #1 will divide their parent’s 50% share, while child #2’s daughter will inherit her parent’s entire 50% share. It is almost certain that disputes will arise over issues such as usage of the property, as well as the financial contributions expected from the various owners.

While such potential trouble spots abound, there are viable ways for the parents to plan to keep the vacation home in the family for generations to come. The parents should consider placing the vacation home into either a “vacation home trust” or a limited liability company (“LLC”). Both planning tools have similar features. After the parents’ deaths, title to the vacation home would not pass to the children; rather, the home would remain titled to the entity, with the trust agreement or LLC operating agreement setting forth the family members’ rights and responsibilities, through all the generations.

For example, if the parents have three children, the trust agreement might provide that each child – regardless of how many children any particular child may have -- would have a single vote on all major decisions affecting the vacation home. Each child’s single vote could be passed on to their respective children, so no child would be benefited, or disadvantaged, by having more or fewer children than their siblings. The agreement might also provide for a “draft” of preferred dates for uses of the home, with each child (or their offspring) getting first choice annually on a rotating basis. The agreement can also provide for consequences – including restrictions on use of the home -- if one of the family “branches” fails to pay for property taxes or other expenses.

The types of provisions that can be included in a vacation home trust or LLC agreement are limited only by the imagination of the parents and their estate planning advisor. But failing to address this critical planning issue is almost certain to lead to the end of the family retreat – and may even result in a permanent rupture of the children’s relationships.

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