It’s officially summer, and our thoughts turn to summer fun, perhaps at a vacation home of a friend or family member or, if you are lucky enough, yours! If you are the owner of a vacation home, it’s never too early to think about planning for this unique asset. 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, the property holds a special place in your family’s hearts and memories, so it is especially important to make sure the property will be there for them to enjoy. Here are five things to consider when planning for your vacation property:

1.  Do Your Children Share Your Hopes and Dreams?
It’s important to determine if you and your family share the same vision for the future of your vacation home. You may intend to leave your vacation home to all of your children to use and enjoy for their lifetimes, but it is important to consider whether your plan is 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? Or is the home primarily used by one or two children who live close enough to visit often? When planning for the future of your vacation home, talk to your children about your thoughts and encourage them to be honest with you. Knowing who wants to keep the property and who has no interest in owning a second home is vital information before you begin your planning. If the home will be left to some but not all of your children, you should consider whether it is important to equalize the inheritance each will receive, and whether that is possible considering the other assets you own.

2.  How Will the Bills Get Paid?
Acquiring a second home is only half the battle. Maintaining a second property requires time and resources. If you are leaving vacation property to family members, consider whether they will be able to maintain it taking into account the carrying costs of the particular property, its age, and anticipated future expenses. If you intend for the owners to contribute to the cost of maintaining the property after your death, consider whether all of them can afford to do this, or whether it makes sense to leave the property (and the financial burdens of its maintenance) to those who can afford the expenses that go along with owning such a property. If you are financially able to do so, you may want to leave extra money to support the property which can be used to pay ongoing expenses and make repairs as needed, and take the burden of those expenses off of your family members. If this is the route you choose to go, don’t underestimate the funds that may be needed, and err on the generous side if you are unsure.

3.  How Will Decisions be Made?
No matter how smart your children are or how well they get along, it is always helpful to have a plan for how decisions will be made about who can use the property and when, what improvements will be made to the property, and when and if the property should be sold. It is helpful, whether in a Trust or other written agreement, to set out rules that clearly govern how these matters are decided, and how disputes are resolved. If a child cannot contribute to his share of the expenses, or 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. If disagreements arise and there is no clear path to resolution, this will ultimately lead to the sale of the property, which is not a good result unless it is one that is agreed on by all involved.

4.  Don’t Forget the Tax Planning.
Vacation homes are often a beloved asset, but they are an asset nonetheless, subject to estate tax like the other assets in your estate. If you have a taxable estate (which means the total value of all of your assets exceeds $1 million if you are a Massachusetts resident), it is crucial to consider how estate taxes will be paid when planning for a vacation home that will not be sold following your death. 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. Consider undertaking planning to reduce the tax bite at your death. This type of planning may include gifting the property or an interest in the property during your lifetime. Consider whether owning vacation property in an LLC may be appropriate if the owner lives out of state and the vacation home is located in Massachusetts. Consider using life insurance to 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. And consider incorporating generation-skipping tax planning into your estate plan to reduce or eliminate estate tax that would otherwise be payable in your children’s estates

5.  Transfer during lifetime or at death?
Many vacation homeowners intend to continue to own their property during their lifetimes and leave the property to their heirs at their deaths. By doing so, they remain the sole decision-makers and keep 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 make sense for tax planning or long-term care planning reasons. Lifetime gifts of vacation homes are something that should be considered, balancing the capital gain tax and control implications of such a gift against the estate tax cost of retaining ownership until death. However, keep in mind that if you intend to use your vacation home after giving it away, rent will need to be paid to the new owners to avoid inclusion in your estate for estate tax purposes.

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. If you have a vision of your descendants enjoying your beloved cottage and building memories there, take the necessary steps now to make your wishes a reality.

Maria Baler, Esq. is an estate planning and elder law attorney and partner at Samuel, Sayward & Baler LLC, a law firm based in Dedham. She is also a former director of the Massachusetts Chapter of the National Academy of Elder Law Attorneys (MassNAELA), and the former President of the Board of Directors of the Massachusetts Forum of Estate Planning Attorneys. 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.

July 2023
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