Ownership of The Family Vacation Home
Estate Planning Summer Series
So, you’ve picked a location and decided to purchase that vacation home that you have long imagined owning and being the center of many wonderful family memories. Let’s assume that the family has discussed the issues discussed in our first article – Home Sweet Vacation Home. Now the big question is, how should you own the property?
Depending on your goals, there are different ways in which you can own a vacation home. The reasons for, and the pros and cons of owning the vacation home in one of the following different structures, are as different as vacation homes themselves. There is no one size fits all when it comes to ownership of a vacation home. There are, however, some general issues concerning each structure. Here are just a few considerations:
1. Ownership as individuals or as co-tenants. This is perhaps the most common and “easiest” form of ownership. By “easiest” I mean that it is easy for you as an individual, or as husband and wife, to simply have your name(s) on the deed as owner. Most people own their primary home in this manner, so they simply assume that a vacation home should be owned the same way. During your life, owning a vacation home outright is straightforward. If you have children who you want to own and enjoy the vacation home after your death, however, this form of ownership can be a problem. Each child would be a co-owner with each of his or her sibling. Their ability to reach a consensus over issues such as who can use the home, when can each child use the home, or who will pay for ongoing maintenance and expenses, becomes more difficult. One child may not be able to afford the vacation home and would rather have the cash to pay for other expenses or needs. If agreement cannot be reached amongst your children, one could have the courts force a sale of the property.
2. Trusts. A trust is legal agreement which governs who will be able to use family vacation home and how they can use it. The trust agreement can spell out how and when a child’s interest in the home can be transferred. The vacation home can also be protected if a child owner faces creditor issues, divorce or other liability. You can also set aside funds in the trust to cover future expenses, thereby relieving your children from that responsibility. You name a trustee to make decisions concerning the vacation home and to oversee the property’s management.
There are some considerations for owning a vacation home in a trust. Issues such as who will serve as trustee and how that person can be replaced if necessary must be addressed in the trust and amongst the family. Also, a trust can be less flexible and difficult to amend without court intervention if family circumstances change.
There are many different types of trusts that can be used in vacation home ownership. The type of trust depends on the family’s unique situation and goals. Two more common types of trusts we see with respect to vacation homes are the simpler revocable living trust and more complex Qualified Personal Residence Trust (QPRT). Each trust serves similar and at times entirely different purposes and should be discussed with your estate planning attorney.
3. Limited Liability Company (LLC). Perhaps the most efficient and preferred method of vacation home ownership is through a limited liability company (LLC). An LLC is a business structure made up of members. Each member owns shares of the LLC. A thorough and properly drafted operating agreement between the members would govern the ownership and management of the property. The operating agreement is easy to amend if your family’s situation changes. Likewise, membership interests can be easily transferred. Finally, especially if you consider renting the vacation home, an LLC can provide your children with personal liability protection against claims by someone who may be injured on the property, other creditors or claims of another member’s divorcing spouse.
Whatever form of ownership you decide upon, it should be based on your goals for the vacation property. An open and honest discussion between you and your children, especially if it is your intent to have the home remain in the family for generations after your death, is essential. Only after coming to an understanding with your loved ones, can your estate planning attorney put the right plan in place.