By Attorney Maria Baler (January 2012)
Vacation homes come in all shapes and sizes – the small bungalow on the lake, the cottage on Cape Cod, the rambling seaside home in Maine, the ski chalet or the cabin in the woods. For those lucky enough to own a second home, they know how much family members look forward to spending time there together and creating lasting memories. If you are the owner of such a property, it’s never too early to think about the future of your vacation home. Is this a property you wish to pass on to your children and grandchildren so the good times can continue long after you’re gone? In many cases, your heirs may not be able to purchase a vacation home on their own so it is especially important to make sure the property will be there for them to enjoy.
Here are five ideas to consider when planning for your vacation property:
1. Do Your Children Share Your Hopes and Dreams?
You may intend to pass your vacation home to all of your children to use and enjoy for their lifetimes. When planning, it is important to consider whether these intentions are realistic. Take a hard look at how the property is used and by whom. Do all of your children enjoy the property and will they continue to do so in the future, taking into account their busy lives and where they live? If you intend for your children to contribute to the cost of maintaining the property after your death, consider whether all children can afford to do this or whether it makes sense to leave the property (and the financial burdens of its maintenance) to the child or children who can afford the expenses that go along with owning such a property.
2. How Will Decisions be Made and Bills be Paid?
No matter how smart your children are or how well they get along, it is always helpful to have a plan for how decisions are made relating to the property – such as who can use the property, how routine expenses will be paid, and what and when major improvements are made to the property. Without rules that clearly govern how these matters are handled or disputes are resolved, a dominant child (or child’s spouse) may overpower the others, fostering resentment and resulting in potential impasses that can delay decisions and contribute to the deterioration of the property.
Considering how to fund the payment of property expenses is also an important part of planning for your vacation property. You may anticipate that your children will contribute equally to the upkeep of the property in the future. But no matter how financially comfortable your children are now, jobs and fortunes can be lost, children relocate, and circumstances change. If children are unable to pay their share of expenses and/or if a child wants to sell his interest in the property, a structured plan will allow for such transitions, including the opportunity for siblings to buy out one another.
3. What Will the Future Bring?
The best laid plans can be derailed by unexpected issues that arise in every family – divorce, debt, disability, and long-term care expenses can all put a vacation home at risk. Planning can anticipate and address current and future owners’ issues and protect against or resolve them in a way that does not disrupt the overall plan for the property. In most cases, in order to plan appropriately for a vacation property and create a structure for decision making and the payment of expenses, the property will be owned by some type of entity, for example a trust or a limited liability company (LLC). The type of entity you use to own your vacation property will determine the extent to which the property is protected against issues affecting its current and future owners.
4. Would Some Extra Cash Be Useful?
Life insurance can be used in creative ways to protect your long-term plans for your vacation property. Life insurance on the current owner’s life can create a reserve fund from which expenses can be paid after the owner’s death, relieving the future owners from the obligation to contribute to those expenses on an ongoing basis and reducing the risk that those expenses will not be met. If the property is not going to be left to all of your children, life insurance can create additional assets that can be used to equalize the distribution of your estate among your children, if that is important. Finally, life insurance can provide a resource from which estate taxes can be paid, reducing the possibility that the property will need to be sold to satisfy a tax obligation.
5. Does Skipping a Generation Make Sense?
Consider the benefits of generation-skipping transfer tax planning that will allow the property to avoid estate taxes in your children’s generation. If this is a property you anticipate your heirs enjoying beyond your children’s generation, such planning can save a tremendous amount of estate taxes and also insulate the property from issues that may arise during your children’s lifetimes.
Thoughtful and timely planning for a vacation property can ensure the property will pass to future generations in a way that will minimize issues and maximize the chances the property will be enjoyed by your family for generations to come.
Attorney Maria Baler is an estate planning and elder law attorney and a partner with the Dedham law firm of Samuel, Sayward & Baler LLC. She is also a director of the Massachusetts Chapter of the National Academy of Elder Law Attorneys (MassNAELA). For more information, visit www.ssbllc.com or call (781) 461-1020. This article is not intended to provide legal advice or create or imply an attorney-client relationship. No information contained herein is a substitute for a personal consultation with an attorney.