Don’t Take a Vacation From Estate Planning

According to the National Association of Realtors’ 2011 Investment and Vacation Home Buyers Survey, there are 7.9 million vacation homes in the United States, Many people like the idea of going to their own place for weekends and longer stays. Owners may dream of seeing children and grandchildren get together for wonderful family experiences at a treasured vacation home.
These experiences may happen during the owner’s lifetime, but reality can be quite different after the owner’s death. If a vacation home
owner leaves the house to more than one heir, serious disputes can arise. The new owners may not agree on capital expenses or who should pay them.
Example: Jim and Karen Warner bought a New Jersey beach house decades ago. Over the years, their children and then grandchildren spent time there. Jim died and left the beach house to Karen, who left it equally to their three children at her death. The oldest child, Chris, now works for a software company in California and never uses the New Jersey beach house. Sarah, a prosperous real estate attorney in New York, uses the house often with her husband and her three children. Emily, the youngest, is an aspiring but as yet unsuccessful actress and novelist who uses the house infrequently. After a severe winter, Sarah wants to hire a roofer for extensive and expensive repairs, but Emily doesn’t think they’re necessary. Chris doesn’t bother to respond to calls or emails about the roof contract; he doesn’t intend to pay one-third of the cost if a roofer is hired.
Avoiding acrimony
Such an outcome may be the norm rather than the exception if a vacation home is simply left to more than one individual. Therefore, if you own a vacation home, it should be integrated into your estate plan. Be realistic about the prospects of the new owners handling the bequest without disputes.
One solution is to sell the vacation house while you are alive, perhaps when family use has declined. Any profit probably will be taxed as a long-term capital gain, which now qualifies for a favorable tax rate. The sales proceeds can be given or bequeathed to your heirs, who can buy their own vacation home or use the money for other purposes. If you do not sell your vacation home while you are alive, your designated heir or heirs could inherit during a weak real estate market and therefore be stuck with ongoing expenses as well as a property that’s difficult to sell.
Another approach is to leave the house to just one child while equalizing inheritances. In the Warner family example, Karen might leave the house to Sarah, the attorney who is most likely to use the house, and bequeath other assets of comparable value to Chris and Emily.
Without the beach house to promote discord, Sarah might invite her siblings for occasional visits.
Alternatively, the owner of a desirable vacation home might place the property in trust or in a limited liability company (LLC). Some funding could be provided to cover the operating expenses, and the trust or LLC documents could describe a procedure for the buyout of a beneficiary who would rather have cash than the right to use the home. If this arrangement appeals to you, our office can help you determine the necessary funding to keep your vacation home a family retreat.