Many families have traditions for summer and want to meet a vacation home in the family as part of their legacy.
However, leaving properties this way for the next generation is not always in the family’s best interest. Some people try to make a simple solution work for a complex problem, leading to more challenges, as explained in the article “Succession planning for the family lakehouse” from NH Business Review.
Will this be a source of family harmony or discord? There are simple options, like joint ownership among siblings. Such ownership can lead to disputes about how the home is used, operated, and maintained. Some children want to continue using the house, while others may see it as an income stream for a rental property. There may be siblings who cannot afford to participate in the house’s upkeep and need the cash more than the tradition. How will it be decorated? When joint ownership is directed as a surprise in a will, the adult children may find themselves fighting about the vacation home, with no parent around to tell them to knock it off.
Making matters more complicated, if the siblings live in different States and the house is in another State, ownership of the real estate at death may subject the decedent’s estate to estate taxes where the property is located. As a result, the property may need to go through probate in an additional state. Every state has its own tax rules, so the transfer of joint property will have to be analyzed by an estate planning attorney knowledgeable about the laws in each state involved.
A sensible alternative to keep a vacation home is creating a Limited Liability Corporation, ideally while the original owners—the parents—are still living or in an ongoing trust. For a trust, you can provide structure and flexibility but will not have a shield from lawsuits, so it may not be a good choice for a vacation home that will be partially rented.
For an LLC, the organizational documents include a certificate of organization to file with the Secretary of State and an operating agreement. The LLC will need its taxpayer identification number or EIN.
The operating agreement governs the management of the property and addresses the operational expenses and maintenance of the property. It should also manage the process for a child to cash in on their ownership to other children. The Trust or LLC operating agreements often include these items:
- Responsibilities for operating expenses
- The process of transferring member units or interests
- Duties for regular maintenance, budgeting, and approval of property improvements
- Development of a property use schedule
- Establishing rules for the home’s use
- Options for an exit strategy for a family member that won’t or can’t participate.
Provisions should also be made for some carrying charges on the property so that taxes, insurance, and needed major repairs. We suggest a cash bequest to the continuing trust to cover these for a reasonable time. For an LLC, funding an account in the LLC would accomplish a similar goal.
Some costs are associated with creating an LLC, including annual filing requirements. However, these will be small compared to the cost of family fights and untangling joint ownership.
An LLC can also offer personal liability protection from lawsuits brought by renters, creditors, or any litigants. If there is an accident resulting from work on the property, the owners may be shielded from the liability because they do not personally own the property; the LLC does this well.
In the case of divorce, bankruptcy filing, or a large judgment against one of the children, the LLC will protect their interest in the property.
The real estate owned by a trust or LLC is not part of the owner’s probate estate. This avoids needing another probate in the state where the property is located. Some states have adopted the Uniform Transfer on Death Security Registration Act, and the LLC membership interest can be assigned along with the terms of the beneficiary designation.
Planning for what will happen to a vacation home after death provides peace of mind for all in the family. Speak with an experienced estate planning attorney to preserve the property and the family’s peace.
Reference: NH Business Review (March 23, 2022) “Succession planning for the family lakehouse”