Vacation homes are often places where happy family memories are made. Unfortunately, they can also be the source of headaches and disputes when heirs disagree about how to manage them.
So, as many second homeowners are closing up their family retreats for the season, it might be a good idea for those at or nearing retirement age to think about how they might pass the asset down to the next generation – especially when multiple children and their spouses will be entering into joint ownership.
“Mom and Dad start out with ‘everything is working out just fine,’ but when you try and walk them a decade forward, sometimes they can see that things might not go as smoothly,” said Wendy Goffe, a Seattle-based estate attorney who has helped many families talk through the issue.
More clients are approaching Merrill Lynch Private Banking & Investment Group for help in transferring a home from one generation to the next, said Stacy Allred, director of wealth structuring for the group. “They wanted to keep the vacation home in the family, and they were seeing what was happening with their neighbors – a vacation home gone bad,” she said.
CREATE A MASTER PLAN: Before anything else, have an honest conversation about whether there’s an interest in keeping the home. After crunching the numbers, it might not be desirable or feasible, said Michael Liersch, director of behavioral finance for Merrill Lynch Private Banking & Investment Group, in a paper the group published on the topic.
Even if there is no mortgage, there are taxes and maintenance costs.
If everyone is still game, create a master plan for the home, detailing its long-term future and how it will be handed down, Goffe said. For example, decide if the home is to be a place of solitude or used for frequent entertaining. Discuss any plans to develop the property further.
HANDING DOWN PROPERTY: Property can be handed down through an irrevocable trust, or by creating a limited liability company, in which the grantors gift shares.
Or, as a way to test the situation out, families can set up a revocable trust while the owners are still alive. It’s like inheriting the home with “training wheels,” incorporating rules for how the family can use and operate the cabin, she said.
There are benefits and drawbacks to each; it’s best to consult a professional on what course is best for your family.
HOUSE RULES: By establishing house rules, everyone is clear about how time slots to use the vacation home are chosen, and how they need to leave the home once they’re done.
Some families create a checklist to ensure towels are washed, folded and put away, the dishwasher is empty and perishables are removed from the refrigerator, Goffe said. Failure to follow the rules can bring consequences, such as having your next use period shortened by a day or having the last pick of time slot next season, she said. Or, if a professional cleaner has to come to tidy up after you, you might have to pick up the bill, Goffe said.
It’s also important to create rules on how someone can get rid of their share of the home – especially if they don’t have the means to pay expenses.