With summer upon us and pandemic-induced quarantines a distant memory, at least here in the Northeast, we are all looking forward to some fun this summer. If you are lucky enough to have a second home you are probably spending some well-earned vacation time there right now with family members, creating lasting memories. If you are the owner of a vacation home, it’s never too early to think about the future.
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 things to consider when planning for your vacation property:
1. Do Your Children Share Your Hopes and Dreams?
You may intend to leave 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? 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 plans 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.
2. How Will the Bills Get Paid?
If you intend for your children to contribute to the cost of maintaining the property after your death, consider whether all of your 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. 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 – such as who can use the property and when, what improvements will be made to the property, and whether 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
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. It is crucial to take into account how estate taxes will be paid when planning for a vacation home that will not be sold. 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 by gifting the property or an interest in the property during your lifetime, and at your children’s death by incorporating generation-skipping planning. If taxes must be paid, 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.
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. As Congress debates estate tax changes that could reduce the federal estate tax exemption, 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.
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. Failing to plan and simply hoping that your children will “figure it out” is the clearest path to family discord, which is the last thing you need on a relaxing family vacation.
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 current 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.
© 2021 Samuel, Sayward & Baler LLC