Owning a vacation property or second home is a dream for many people. While vacation properties are chosen for their leisure value, they’re still properties that come with responsibilities. Proper planning can help you maintain your vacation property and set it up for use by future generations. You should consider all of the following issues when it comes to your vacation property.
Planning Ahead for Your Vacation Property
What happens to your property upon your passing depends, in part, on how the property is held now. If you are the property’s sole owner or if you own it as a tenant in common with one or more other person, you need to decide what will happen to your interest in the property. If you own the property with another person as joint tenants with rights of survivorship or with a spouse as community property with rights of survivorship, then your interest will automatically transfer to the remaining owner without court involvement. If a trust or limited liability company owns your vacation property, the entity will continue to own the property after your death. The trust instrument or operating agreement may lay out additional instructions about what will happen at your death.
What Do You Want to Happen to the Property at Your Death?
Having a legal plan in place for your assets, including your vacation property, can help you accomplish goals that extend past the end of your life. If you fail to establish a plan for your vacation property (and it is not owned in joint tenancy with right of survivorship, tenancy by the entirety, or community property with rights of survivorship), state law will dictate what happens to the property in probate. Probate is the legally established method of paying debts, distributing assets, and wrapping up the affairs of a person who has passed away. Vacation homes carry an additional concern. If that property isn’t in your state of residence, your beneficiaries may have to go through two probate processes with different state laws being applied. Here are a few paths to consider when it comes to estate planning around a vacation home.
- Give the property outright to a loved one. This person may be your oldest child, someone who has expressed interest in continuing to use the property, or an individual with the financial means to maintain the property.
- Leave the property outright to a group of people. Because your whole family enjoys gathering together now, you may wish for them to continue gathering at the vacation property after you pass away.
- Give the property to a group of people as tenants in common and create an ownership agreement. Because there are multiple parties involved, each with their own property interest and personal financial situations, an ownership agreement can lay out each one’s rights and responsibilities.
- Prior to your death, transfer the property to your revocable living trust to be held for a long period of time or indefinitely. Because the trust is the property’s owner when you die, the beneficiaries will merely look to the trust to see what happens. There is no need for probate, and you can specify any rules you may have for the property and how it is to be held or distributed to one or more chosen beneficiaries. Note: State law may limit how long the trust can remain in effect (the rule against perpetuities). If you want the trust to hold the property indefinitely, speak with an experienced estate planning attorney about how to accomplish this goal.
- Prior to your death, transfer the property to a special trust that owns only the property to be held for a long period of time or indefinitely. This option may be advisable if you want to separate one property from the rest of your money and property to be managed on its own or if you have asset protection concerns. This trust agreement would also lay out each beneficiary’s specific rights and responsibilities with respect to their use and enjoyment of the property.
- Prior to your death, transfer the property to a limited liability company to be held for a long period of time or indefinitely. Depending on your objectives for the property, transferring it to a limited liability company may provide the beneficiaries with some additional asset and liability protection. The company operating agreement may also specify each company owner’s rights and responsibilities with respect to any company property.
- Have your representative sell the property. A vacation home may present too many challenges when it comes to family dynamics. One simple way to avoid disputes is to sell the property and divide the resulting assets. Your loved ones may be better off with the money and without the pressure of maintaining (and sharing) the vacation property going forward.
Consider the Costs of Your Vacation Property
As much joy as a vacation property can bring, most properties carry with them a number of expenses. If the beneficiary or beneficiaries of the property will struggle to cover those costs, you might want to consider a different plan. Weigh the likely expenses of the property to the new owner or owners, including taxes, maintenance costs, utilities, insurance, and the mortgage if the property carries one. If they can’t cover these costs and still have the time and money left to enjoy the property, it’s likely they’ll be forced to sell in the near future.
Group Ownership Carries Unique Challenges
It’s not unusual to want a vacation home to stay in the family. However, leaving one property to more than one child or loved one can create problems. Rather than bringing your family together, co-ownership of the vacation property can create strife. If your loved ones can’t cooperate on how to use and maintain the property, trouble will arise. Your estate plan can help avoid problems by laying out the following:
The rights of each party to use the property
- The responsibilities of each party toward the property
- Who has ultimate authority to make decisions for the property
- How to resolve disagreements between the parties
- What happens if one or more parties want to terminate their interest in the property
Creating a Plan of Action
Knowing what you want to do with your vacation property is just the starting point. Your estate plan must codify your plan in accordance with state law. Having an established plan clearly communicates your wishes regarding the property. Spelling out the rights and responsibilities of your beneficiaries will help ensure that your plans come to fruition.
An estate plan can also help resolve financial concerns about your beneficiaries’ ability to handle the vacation property. With the help of financial advisors, you may be able to establish financial tools to cover these costs. With additional help from insurance and tax experts, you can get a clear understanding of how to handle your vacation property in your estate plan.
Talk to an Experienced Estate Planning Attorney Today
A vacation property can bring families together. Finding the best way to handle your vacation property in your estate plan can ensure that it remains a source of joy and togetherness. At the Law Office of Janet L. Brewer, we can help you create an estate plan that accomplishes your goals.
To discuss your estate planning needs, call our Los Altos offices at 650-325-8276 or contact us online.
