For Jack and Jane, their lake cabin in Minnesota had been the ideal family retreat. Their three children, Bob, Betty and Bill, had learned to fish and water ski during their summer vacations and how to snow ski during their winter breaks. Their cabin had also been ideal for weekend get-a-ways, with the family also frequently hosting their childrens’ friends and making over three decades of memories.
The cabin had become a second home for the family. And now that each of the children was married with children, it was becoming a memory maker for each of their families as well. However, Jack and Jane’s enjoyment of the family retreat was also the source of some worry. While they hoped their family would continue to always get along, they weren’t so naive to expect that would be the case. The last thing they wanted was for the cabin to become the source of disputes and heartaches.
Their estate planning attorney had simply placed their vacation home into their Living Trust, to be distributed to the children equally after Jack and Jane passed away. When Jack and Jane came to meet with me to discuss their pre-exit and succession planning for their family business, they also wanted to discuss their vacation home succession planning. They had specific questions they wanted to address about the future of the cabin after their deaths:
- What would happen to the cabin if one of the children died?
- What would happen if one of the children got divorced?
- What would happen if one of the children couldn’t afford (or didn’t want to pay) their share of expenses (or had future creditor problems)?
- What would happen if one of the children insisted on selling their share?
- What would happen if the children disagreed about how the cabin would be operated and maintained?
- How could the cabin’s use be scheduled to avoid disputes?
- How could the cabin be preserved so it could be passed down to Jack and Jane’s grandchildren after their childrens’ deaths?
- How could this be accomplished in a tax efficient manner?
Jack and Jane presented the classic situation for Vacation Home Succession Planning. Vacation Home Succession Planning (also known as Cottage Succession Planning) refers to the legal and financial strategies used to help keep the family vacation home peacefully and effectively in the family for successive generations. These strategies can be used whether your vacation home is a million dollar second home overlooking the ocean or a small log cabin in the woods.
This form of advanced Estate Planning comes into play whenever a family has a cabin, beach house, cottage, lake home, camp, farmhouse, chalet, ski condo, hunting lodge, winter home, summer home, second home or other vacation home which they want to pass on to their heirs to keep in the family for future use and enjoyment. The use of a regular Estate Plan, even with a Living Trust, is not adequate. The questions which Jack and Jane had, along with others, are each addressed in a Vacation Home Succession Plan. A Vacation Home Succession Plan will help you and your family to avoid the following:
- Vacation and usage scheduling conflicts.
- A difficult transition from the parents to their heirs.
- Conflicts between your children and other heirs after the parents’ deaths.
- Disagreements regarding care and maintenance.
- Conflicts over how funds are to be spent.
- A vacation home partition lawsuit filed by a child or heir who wishes to cash out their share of the property.
- Unnecessary death taxes.
- Loss of a property to a child’s ex-spouse in a divorce or creditors in a bankruptcy.
- Tie up of the property in a parent’s or child’s estate upon their deaths.
- The need for the heirs to provide the funds to keep the vacation home in the family.
A Vacation Home Succession Plan will help you and your family to accomplish the following:
- Funding and payment of expenses for the upkeep of the property.
- Policy for how decisions are made regarding the property.
- Guidelines for addressing conflicts between family members (without needing to go to court).
- Agreement for when an ownership interest may be purchased from a family member.
- Agreement for when a family member can or must sell his or her share of the property and how the ownership interest should be valued. Guidelines for scheduling use of the property.
- Requirements for when and how the property can be sold and how the sale proceeds will be paid out.
- Requirements for what occurs if a child or grandchild becomes bankrupt or gets divorced.
- Setting up a Vacation Home Endowment Fund (e.g. from a share of the parents’ estate, life insurance proceeds, or an investment fund established during the parents’ lifetime), which would be based on expected future operating, repair, maintenance and upgrade costs and fund earnings.
- The banking and investment management associated with the endowment funds.
- The most favorable tax treatment of the vacation home.
The lynchpin of a Vacation Home Succession Plan is usually a Vacation Home Limited Liability Company (“LLC”). The LLC can either be established before the parents’ deaths (an “Immediate LLC”) or it can be designed to be created and go into affect upon the parents’ deaths, based on the LLC documents incorporated into their Estate Plan (a “Springing LLC”). The LLC needs to work in conjunction with the parents’ Living Trusts and Wealth Management Plan. The key guidelines for LLC ownership and vacation home operation are detailed in a special purpose Vacation Home LLC Operating Agreement. Simply leaving the family vacation home outright to all children in equal shares is a recipe for family hard feelings and potential disputes at best and a lawsuit at worst. Almost every family will have members with different financial means and with different and potentially conflicting views on how the home is to be used, managed and passed on. A well constructed Vacation Home Succession Plan offers parents with the opportunity to do a special favor for their children and grandchildren which is a gift which will keep on giving and giving for years to come. If you would like to discuss this strategy, please contact us.
For information on vacation home succession planning, go to: www.VacationHomeSuccessionPlanning.com
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