Keep it All in the Family: Make Sure You are Properly Planning for Your Vacation Home
If your family owns a vacation home, you know what a relaxing refuge it can be. This has been particularly true during the global pandemic, when an escape from daily life has been desired, but comfort levels with non-essential travel have not been high. Even as we emerge from the lockdowns and strong restrictions, some may want to limit travel to minimize the risk of exposure. However, without a solid plan and ground rules that all family members agree to, conflict and tension may result in a ruined vacation — or worse yet, having to sell the home.
From an estate planning standpoint, it’s important for all family members to understand who actually owns the home. Family members sharing the home will more readily accept decisions about its usage or disposition knowing that they come from the person holding legal title.
If the home has multiple owners — several siblings, for example — consider the form of ownership carefully. There may be advantages to holding title to the home in a family limited partnership (FLP) and using FLP interests to allocate ownership interests among family members. You can even design the partnership — or a separate buy-sell agreement — to help keep the home in the family.
Laying down the rules
Typically, disputes between family members arise because of conflicting assumptions about how and when the home may be used, who’s responsible for routine things like cleaning and upkeep, or how the property will ultimately be sold or transferred. To avoid these disputes, it’s important to agree on a clear set of rules that cover using the home (when, by whom); and responsibilities for cleaning, maintenance and repairs. You can even create a document outlining all rules and keep a physical copy in the home to refer to if anyone has questions.
If you plan to rent out the home as a source of income, it’s critical to establish rules for such activities. The tax implications of renting out a vacation home depend on several factors, including the number of rental days and the amount of personal use during the year.
Planning for the future
What happens if an owner dies, divorces or decides to sell his or her interest in the home? It depends on who owns the home and how the legal title is held. If the home is owned by a married couple or an individual, the disposition of the home upon death or divorce will be dictated by the relevant estate plan or divorce settlement.
If family members own the home as tenants-in-common, they’re generally free to sell their interests to whomever they choose, to bequeath their interests to their heirs or even to force a sale of the entire property under certain circumstances. If they hold the property as joint tenants with rights of survivorship, an owner’s interest automatically passes to the surviving owners at death. If the home is held in an FLP, family members have a great deal of flexibility to determine what happens to an owner’s interest in the event of death, divorce or sale.
Handle with care
A vacation home that has been in your family for generations must be handled carefully. You likely want to do everything possible to hold on to it for future generations. For assistance navigating this complex issue and to explore the tax and other financial implications, contact your Anchin Relationship Partner or Jared Feldman, Leader of Anchin Private Client, at [email protected].