Planning for a Family Vacation Home
Family vacation homes are a treasure for many of us, often providing fond memories for multiple generations. Successful planning for a vacation home requires thoughtful consideration of all of the interests of family members involved both now and in the future. Summer is a good time to hold open conversations with family members to develop a plan for the vacation home.
Setting the Guidelines
The best part about having a family vacation home is being able to use it. But with multiple owners come endless operating questions and concerns. Consider the following as you discuss the family vacation home with your loved ones:
- When can the home be used? Who may be invited during these time periods? Does someone oversee and approve the home’s calendar during busy months?
- Who’s responsible for the home’s upkeep on a daily basis and longer term?
- What are the expectations for cleanliness and tidiness? Is there a regular cleaning service or one that can be called to assist? Does trash need to be taken out on certain days?
- Are there notable instructions for the alarm, media system, internet, thermostats and grilling system?
- What should a guest do when something unexpected occurs on the property? Is there a management company or handyman responsible for the home?
- How should the home be left when a guest is leaving? What would you like your guests to do with used towels, linens and food? Should the doors and windows be shut and locked?
- Is there interest in using Airbnb or Vrbo to generate income and support the property when not in use for family enjoyment?
We encourage homeowners to formalize an operating agreement among family members to govern the home’s operation and its members’ financial and managerial rights and duties. This agreement defines each family member or managers’ rights, powers and entitlements, and should set forth the home’s operating rules, including scheduling, use and management of the home to ensure the smooth and satisfying operation of a shared family home. At the very least, the sharing system must address how time is divided and who may use the home, including parents, surviving spouses, cousins, renters, guests and even the family pets. Guidance is needed for the daily and longer-term management decisions, such as renovations, financing, renting of the home or even sale of the home.
While the family vacation home may represent a chance to get away from the rules of everyday life, the best way to ensure a peaceful environment is to have some guidelines.
Keeping it in the Family
If there is a collective desire to keep the vacation home in the family, there are many questions to consider:
- When should the property be transferred to the next generation? During the lifetime or passing of the senior generation owners?
- To or for whom should the property be transferred? To all of the next generation or only to some? If only to some, will there be compensating gifts or bequests to the others?
- How should the property be titled and transferred? Outright? In trust? In an entity?
- How will the property be managed, repairs and upkeep handled and bills paid? What if some family members use the property more than others or have greater financial independence than others?
- Should the family create a designated fund for maintaining the house, and if so, in what form?
- How will use of the home be scheduled? If the 4th of July is the peak holiday, and there are four children and ten grandchildren, but only four bedrooms, who has priority?
Addressing questions like these in the planning process can be difficult, but doing so can make future shared use more enjoyable and less stressful for the entire family.
Joint Tenants with the Right of Survivorship (JTWROS) is the most common way family homes are originally titled. It allows owners to use and sell the property as they wish. If the family vacation home is held by the parents as JTWROS, at the death of the first parent, the property will pass to the surviving spouse. The default solution for a surviving spouse of a jointly owned family home is to leave or give it to their children equally. However, this is exactly how the problems begin. If the surviving spouse gifts the home to multiple children or other beneficiaries, during life or at death, the recipients could face gift or estate tax issues while likely acquiring joint ownership of the property as tenants in common.
Tenancy in Common is a type of shared ownership of property, where each co-tenant (or co-owner) owns a share of the entire property. All co-tenants have the right to occupy and use all of the property, and each co-tenant has the right to freely sell his interest without consent from any other co-tenants. This arrangement is more likely to lead to family conflict than to family harmony as everyone has to agree on everything, typically without a written agreement to govern decisions or behavior. Each co-tenant’s interest also may be subject to creditors’ claims, divorce or even court-ordered partition, which could result in a forced or unwanted sale of the home.
Limited Liability Company (LLC) has become one of the preferred ownership options recommended by attorneys specializing in home succession planning. The LLC incorporates many beneficial characteristics including limited liability to the owners, ease and control over transferability of shares, and potential estate tax benefits as you transfer shares to heirs. Formation of LLCs are done under state law, but not necessarily in the state in which the family home is located, and can be created during life or at death. It may be advisable to form an LLC for the family home during the owners’ life to enable gifting to children and grandchildren as part of their wealth transfer plan.
A Qualified Personal Residence Trust (QPRT) allows the owner (“grantor”) to transfer the family home to a trust for the benefit of the family, but retains an interest in the property for a term of years. The value of the interest transferred to the family, deemed a gift to the family, is the full fair market value of the property minus the value of the interest retained by the grantor. This planning option may not be advisable if the grantor does not have a long-life expectancy as the grantor must survive the life of the trust to exclude the value from his/her estate. At the end of the term, the QPRT may be structured to transfer the property outright to the children or to hold the property in trust for their benefit.
Complete & Proper Planning
As you consider your family’s situation, we urge you to discuss your vision and intentions of your home with your family and your trusted advisors, to establish a rewarding arrangement that will provide a smooth transition of ownership and clear-cut guidelines for use and management of the home.