According to the National Association of Home Builders, there are approximately 7.5 million second homes, making up 5.5 percent of the total number of homes. Vacation homes are not only real estate that must be planned for, managed, and maintained, they are also the birthplace of happy memories for you and your loved ones. The following are some important estate planning questions to consider to ensure that your place of happy memories is protected.
What Will Happen to the Property at Your Death?
The fate of your vacation property at your death largely depends on how it is currently owned. If you are the property's sole owner or if you own it as a tenant in common with one or more other people, you need to decide what will happen to your interest in the property. If you own the property with another person as joint tenants with rights of survivorship or with a spouse as tenants by the entirety, your interest will automatically transfer to the remaining owner without court involvement. If a trust or limited liability company owns your vacation property, the entity will continue to own the property after your death. The trust instrument or operating agreement may lay out additional instructions about what will happen at your death.
What Do You Want to Happen to the Property at Your Death?
The wonderful thing about proactively creating an estate plan is that you get to choose, in a legally binding way, what happens to your money and property. It is important to note that, if you do not create a plan for your property (and if it is not owned in joint tenancy with right of survivorship or tenancy by the entirety), your state will decide for you according to its laws and by putting your loved ones through the probate process. Probate is the court-supervised process that winds up your affairs and distributes your money and property to the appropriate people. It is also important to note that owning property in a different state from where you reside could lead to your loved ones having to open two probates (one in the state where you resided at death and one where the vacation property is located). There are several different options for handling your vacation property.
- Give the property outright to a loved one. This person may be your oldest child, someone who has expressed interest in continuing to use the property, or an individual with the financial means to maintain the property.
- Leave the property outright to a group of people. Because your whole family enjoys gathering together now, you may wish for them to continue gathering at the vacation property after you pass away.
- Give the property to a group of people as tenants in common and create an ownership agreement. Because there are multiple parties involved, each with their own property interest and personal financial situations, an ownership agreement can lay out each one's rights and responsibilities.
- Prior to your death, transfer the property to your revocable living trust to be held for a long period of time or indefinitely. Because the trust is the property's owner when you die, the beneficiaries will merely look to the trust to see what happens. There is no need for probate, and you can specify any rules you may have for the property and how it is to be held or distributed to one or more chosen beneficiaries. Note: State law may limit how long the trust can remain in effect (the rule against perpetuities). If you want the trust to hold the property indefinitely, speak with an experienced estate planning attorney about how to accomplish this goal.
- Prior to your death, transfer the property to a special trust that owns only the property to be held for a long period of time or indefinitely. This option may be advisable if you want to separate one property from the rest of your money and property to be managed on its own or if you have asset protection concerns. This trust agreement would also lay out each beneficiary's specific rights and responsibilities with respect to their use and enjoyment of the property.
- Prior to your death, transfer the property to a limited liability company to be held for a long period of time or indefinitely. Depending on your objectives for the property, transferring it to a limited liability company may provide the beneficiaries with some additional asset and liability protection. The company operating agreement may also specify each company owner's rights and responsibilities with respect to any company property.
- Instruct your trusted decision maker who will wind up your affairs to sell the property. If you believe that the money from the property's sale would be of greater use to your beneficiaries or that none of them would want to buy the property, selling it can be an effective way to provide some money to benefit your loved ones differently.
Can Your Beneficiary Afford the Vacation Property?
While there may be a lot of happy memories associated with your vacation property, you know that there are also a lot of responsibilities. When you decide to leave your property outright to a person or group of people, they will become responsible for financial obligations such as mortgage payments (if any), utility bills, and property insurance and taxes. If you wish your beneficiary to keep the property, you need to consider whether they can meet the financial obligations; if not, they may end up prematurely selling it.
If More than One Person Will Have an Interest in the Property, Do They All Get Along?
All your children may get along now, but will they still be able to come together and see eye to eye when you are no longer living? Owning property together means that they need to be able to communicate, agree, and equally contribute to the property's maintenance. A proper estate plan can address these potential issues by outlining
- everyone's responsibilities with respect to the property,
- everyone's rights to the property,
- who makes the decisions,
- what to do if a dispute arises, and
- how someone can walk away from the property.
What Should You Do to Make Your Wish a Reality?
First, you need to legally document your wishes to ensure that your loved ones know what your wishes are, that they will be followed, and that all possible scenarios have been planned for. Second, if you have concerns about your beneficiaries being able to financially maintain the property, you need to meet with a financial advisor to design a plan that allows you to set aside money for its maintenance. Also, you need to meet with an insurance agent to make sure that the property is properly insured based on its intended use and to acquire additional life insurance in case you need another source of financial liquidity for its maintenance. Finally, you should meet with your tax adviser to make sure that you know of any potential tax consequences of transferring the vacation property, whether during your lifetime or at your death.
If you are interested in learning more about your options for protecting your vacation property and having your wishes for it carried out, please contact the Inhulsen Law team to schedule your in-person or virtual consultation.
About Inhulsen Law
Inhulsen Law is a Michigan law firm serving individuals, families, and businesses in the areas of business law and estate planning. To learn more call us at (616) 747-0000, visit our website.