With full summer upon us, thoughts turn to vacationing. Whether you love the mountains, the beach, or fishing on the lake, everyone wants to take time to recharge during the carefree days of summer. Some people are fortunate enough to own a vacation retreat where family members are regularly invited to get away from it all. Whether it’s a cabin in the woods or a waterfront mansion, passing this beloved property on to future generations in a way that is fair and likely to result in years of happy memory building by generations of family members is a challenge. In fact, sometimes it is so challenging that the owners die without doing any planning for their vacation home, which can lead to serious conflicts among heirs.
Here are five ideas to consider when a vacation home is part of your estate.
- There’s no such thing as setting aside too much money to support the property. One of the primary areas of discord among co-owners of vacation property is money. When mom and dad bought the cabin, they factored in the costs of maintaining the property when making the decision to purchase it. However, for heirs who inherit a percentage of a property, there was no such consideration. It costs money to maintain the cabin, including paying taxes, insurance, utilities and repairs – and not all inheritors are of equal means. If you have a vacation home you want to leave to multiple inheritors, plan to leave funds to pay for the upkeep of the property for at least a few years following your death.
- Involve the next generation in the planning. When planning for the future of your vacation home, talk to your children about your plans and encourage them to be honest with you. Although you dearly love spending time at the cottage, your children may not feel the same way and they may be reluctant to tell you for fear of hurting your feelings. Even if your children also love the family vacation home, they may recognize that because of where they live or because of their personal financial circumstances, ownership of the property is just not realistic. As painful as this may be for parents to hear, knowing who wants to keep the property and who has no interest in owning a second home is vital information in planning.
- Consider tax reduction strategies. In some sad situations, the next generation would love to keep the vacation property, but the estate taxes payable at the parents’ deaths are so steep that they cannot afford to do so. These days, it is not uncommon to find that the humble lakeside cottage purchased 30 years ago for short money is now worth $2 million or more. If you are lucky enough to have one of those properties, consider undertaking planning to reduce the tax bite at your death. Common planning techniques include granting a conservation easement, charitable planning with part of the property, or using a Qualified Personal Residence Trust (QPRT) or other gifting vehicle to reduce the tax value of the property in the parents’ estates.
- Transfer during lifetime or at death? Many vacation home owners intend to remain as the sole owners of the property during their lifetimes and leave the property to their heirs at their deaths. They reason that by doing so, they remain as the sole decision makers and keep all of their options open: they could sell the property, rent it out, change their minds about who will inherit it, etc. However, transferring ownership to the next generation during the parents’ lifetimes can be good tax planning (see #3 above) or a good way to protect the property from having to be sold to pay for a parent’s long-term care expenses. Transferring interests to children during the parents’ lifetimes can also serve as a “practice-run” for management of the property. The parents can tweak their vacation house plan to address issues that arise during their lifetimes while they are still around to do so.
- The devil is in the details, or who gets the week of July 4th? In most cases, a vacation home is a seasonal use property. Even if the Cape house is winterized and can be used in February, not many seek out the beach in the dead of winter. Whether it’s skiing or beaching, there are usually a limited number of “prime” weeks during which everyone wants to use the property. Along with the money (see #1 above), deciding how to divvy up these weeks among the inheritors is a key element to planning for the vacation home. The challenge increases exponentially with the greater the number of people involved. By putting a system in place, parents can reduce the friction that may arise among children with competing interests who are trying to work this out after mom and dad are gone.
If you have a vision of your descendants enjoying your beloved cottage and building memories there for generations to come, take the necessary steps now to make your wishes a reality. Failing to plan and simply hoping that your children will “figure it out” is the clearest path to family discord. An experienced estate planning attorney can help you craft a plan that will have your heirs lounging lakeside or speeding down the slopes for years to come.
* Special thanks to my friend and colleague Attorney Timothy Borchers whose work and guidance in the area of planning for the family vacation home has been invaluable to many of us.
Attorney Suzanne R. Sayward is certified as an Elder Law Attorney by the National Elder Law Foundation, a private organization whose standards for certification are not regulated by the Commonwealth of Massachusetts. She is a partner with the Dedham firm of Samuel, Sayward & Baler LLC. 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. For more information visit www.ssbllc.com or call 781/461-1020.