Estate Planning for Vacation Property
Many parents would like their vacation homes to be enjoyed by their children and grandchildren indefinitely into the future. There are several factors that these couples (or single parents) should consider in deciding how best to accomplish this estate planning goal. These factors include: the number of children, the likelihood that they will cooperate with each other, and their ability and desire to use the home and to pay the expenses of its upkeep. The home’s value and the estimated value of the parents’ estates must also be considered.
One solution is to provide in the parents’ wills or revocable trusts that on the death of the surviving parent, the vacation home may be allocated to the child or children who wish to own it. These children would notify the executor or trustee of their desire to receive some or all of their inheritance in the form on an interest in the home within a specified time limit. Since parents usually want to treat all of their children equally, other assets of equal value would then be allocated to the children who do not want an ownership interest in the vacation home.
If the value of the interest in the home would exceed a child’s share of the estate or trust, that child would have to pay that excess in value to the executor or trustee. If the value of the interest in the home is less than a child’s share of the estate or trust, that child also would receive other assets. The children who receive the home would then work out a schedule for the use of the home and a plan for the payment of expenses on their own.
A more complex solution is to set up a continuing trust to hold the vacation home for the benefit of the children after the parents’ deaths. There are many ways such a trust could operate. For example, investment assets could also be set aside in trust to pay the costs of owning the property. Alternatively, if no funds are set aside, a fee could be charged to each child to pay expenses – perhaps based on usage. A professional trustee, a named child, or a trustee chosen by vote of the majority of the children could act as trustee to manage the trust’s assets. Other issues that must be addressed are how decisions regarding the use of the home will be made, whether or not the children be able to terminate the trust arrangement, and how the trust’s assets will be disposed of after the termination of the trust.
Other alternatives include the use of entities such as a family limited liability company (LLC) or a family limited partnership (LP) to hold the vacation property. These arrangements are particularly appropriate when parents want to make lifetime transfers of their interest in the property to their children while continuing to make decisions regarding the property during their lifetimes or until they are sure that shared decision making among their children will work.
Briefly, the parents transfer the cottage to the LLC or LP. They then transfer ownership interests to their children while retaining the right to manage the LLC or LP themselves. As nonmanaging members of the LLC or as limited partners of the LP, the children have an interest in the LLC or LP. As the managers of the LLC or as the general partners of the LP, the parents retain the right to manage the vacation home – even the right to sell the home and dissolve the entity. The right to manage the LLC or LP can be given by the parents to the children at a later time or upon the parents’ deaths. One of the major differences between and LP and an LLC is that the general partners of a LP are personally liable for the debts of the partnership while the members of LLC are not personally liable for the debts of the company.
The provisions of an LLC’s governing “operating agreement” and of an LP’s governing partnership agreement can restrict the children’s ability to transfer interests in the entity to a nonfamily member. They may also contain “buy-sell” or other provisions specifying what happens if a child wants to withdraw from the LP or LLC. Generally a LLC’s operating agreement may be more flexible than the provisions of a LP’s “partnership agreement.”
The estate planning attorneys at Berry Moorman are experienced in helping clients consider the practical realities and varied options for continuing family ownership of their vacation homes. We assist our clients in selecting a plan that best fits their needs and particular family situation. For additional information or assistance, contact one of our attorney in the Estate Planning Group.