What to do with your vacation home

By Deborah L. Anderson

Family vacation homes are emotionally tied to family holidays and gatherings, and are often owned by grandparents or parents who are covering all of the expenses of the vacation home.

Overall considerations in transferring ownership of a vacation home

The older generation should have a conversation with the younger generation to be sure that they want to keep the vacation home in the family. There will be tension among family members who live close to the vacation property and those who live farther away, and conflicts may arise with respect to how much different family members may use the property at different times in their lives.

Some of these issues may be alleviated by sufficient funding of the family vacation home ownership vehicle to cover future expenses. Also, the family must address whether to have buy-out provisions in case a family member does not want and will never use his or her "share" of the vacation home.

There are many options to consider in planning for how to hold legal title and arrange ownership and management of a family vacation home. Each family must determine what option is best for their situation and the state in which the residence is located. Options for holding title to the family vacation residence include the use of a trust, limited liability company, corporation, ownership as tenants-in-common, or joint tenancy with rights of survivorship, or some combination of these forms of ownership.

Why do some families prefer ownership to be in a trust?

The use of a trust provides the older generation the most control over the ultimate ownership of the family vacation home for the younger generation as well as over the proceeds from a possible sale of the family vacation home.

There are significant estate tax advantages of using a trust as the older generation can allocate generation-skipping transfer tax exemption(s) to the trust so that the trust will not be taxed in the estates of the younger generation family members and can pass free of estate tax down the generational lines to remote descendants.

Use of a trust makes it easier to ensure that ownership of the family vacation home will be passed on to family members who are lineal descendants and not to spouses (or divorcing spouses). Trust ownership means that the family vacation home can continue to be held for the benefit of younger generations, assuming that is the goal of the family.

By funding the trust with cash, the older generation can also ensure that there will be sufficient funds available for eventual capital improvements to the property such as a new roof or furnace, as well as funding part or all of the annual operating expenses.

Why do some families prefer ownership in a Limited Liability Company?

Some families use a limited liability company (LLC) to hold legal title to the family vacation home. The LLC can be used alone as the owner with individuals as the members, or the LLC can hold legal title with the trust as the sole member of the LLC.

Ownership through an LLC provides creditor protection and flexibility in ownership. If membership interests in the LLC are owned directly by the children (as the first younger generation), however, then each child's share of the family vacation home will be subject to estate tax in that child's estate. Depending on the value of the vacation home, this could create an estate tax problem for each child, which would need to be addressed by life insurance or other sources of liquidity (such as the ability of other family members to buy that child out).

These are complex issues and the family dynamics that come into play can make drafting the LLC Operating Agreement more complicated.

Management of the vacation home

In order to help ensure family harmony, it is very important that the ownership vehicle provide rules which govern the use of the property and how expenses will be paid. This is somewhat dependent on how much liquidity there is in the ownership vehicle. If ownership is in an LLC, the agreement should address what happens if a member cannot cover his/her shared expenses.

It is also critical that there is sufficient property insurance in place to protect the family's interest in case of a fire or slip and fall by a visitor or renter. If it will be necessary for the younger generation to rent the property for some portion of the year in order to cover operating expenses, then it is advisable for an LLC to hold legal title to the vacation home.

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Deborah L. Anderson


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