With proper planning, owning vacation property with other family members can be a pleasant and even bonding experience. The key is to determine, as early as possible, what the parties expect and desire from the property ownership and the most effective and efficient manner of ownership.
Often times, family members will inherit or receive as a gift vacation property from their parents or other relatives. The property may come to them in the form of a trust, an entity (such as a limited liability company or partnership) or without either, in their individual names. When parents are planning for ownership by their children, it is very important for them to discuss with their children how the children feel about owning the property. Parents may have a desire to keep vacation property in the family when some or all of the children have a different vision on how and where to spend their free time and resources. In cases where the children are engaged and excited to continue ownership of the vacation property, it will be important for the parents to consider carefully and discuss with the children at the time of planning, the roles of the children and more remote generations with respect to the property. Open and honest communication between the generations in this type of planning is essential for a successful transition, and we have found that adviser-facilitated family meetings are helpful in most cases to flesh out intent and issues, and in providing a safe space for a family member to say “I’m not sure I really want to participate in or use Nana’s beach (or mountain) cabin.”
Whether parents are transferring property to family members or family members pool resources and acquire a vacation home, it important that the family members discuss ahead of the transfer or purchase how title will be taken, who will manage the property, how usage will be determined, and what happens at the death or disability of one of the family members, among other important issues. If either the property is located or a family member resides in a community property state, issues of separate vs. community property ownership should also be discussed as part of the pre-purchase planning.
In either of these cases, here are some tips to consider:
- Start the planning process well in advance of the transfer or purchase, and involve your advisors, as there are likely important legal and tax aspects to consider.
- Convene as many family meetings before a transfer or purchase as are necessary to thoroughly discuss and map out items such as:
- a family mission or vision statement with regard to the vacation property;
- succession philosophy;
- usage determination;
- whether the property will be rented, and if so, when and how;
- conflict resolution processes;
- maintenance, improvement and other expense funding and future cash contributions;
- management, including bill paying, decorating, repairs, improvements, etc.;
- management succession;
- how to handle compensation for sweat equity and management time;
- how to address financial distress or a marital dissolution or separation of a family member;
- how to address financial distress of the vacation property; and,
- duration of ownership and exit strategy.
- Consider use of a trust (revocable or irrevocable depending on the family goals) or an entity, such as a limited liability company, to own the vacation property so that:
- one or more named family members have centralized management powers over the property;
- a succession plan as to management of the property is specified;
- a usage plan for the property is specified (including who may use the property (family only?); at what cost, if any; at what time(s) of the year and how frequently);
- any rental requirements are set forth for family and/or non-family members;
- compensation for management and sweat equity are covered;
- there is creditor protection (with proper document drafting and planning) against creditors of a family member;
- upon the death of a family member, there is clarity and agreement about where such family member’s trust or ownership trust may pass;
- if a family member experiences a marital dissolution or separation, such family members interest is protected to the maximum extent possible under applicable state law and there is a mechanism for such family or the other family members to purchase the ex-spouse’s interest, if any;
- no family member has the right to sell his or her interest in the property, itself; rather, a family member may sell his or her interest in an LLC in accordance with the terms of the LLC operating agreement, which would typically allow gifts and bequests at death to family members but preclude sales or transfers of LLC interests to anyone other than family members without first giving the family members a first right to purchase the interests); and,
- the exit strategy is documented if a family wants or needs out ownership or if all family members no longer wish to own the vacation property or any replacement property.
- Use a tenancy in common or co-tenancy agreement to address most of the items in a. through j. above if family members own vacation property outside of a trust or an entity. Importantly, in such a case, if family members own vacation property in their own names as either tenants in common or joint tenants and they do not have any such an agreement, then each family member owner has the right to transfer or sell his or her interest in the property to anyone at any time.
- Despite all of the planning, unexpected issues will arise, so be prepared to compromise and to be compassionate and flexible to maintain family harmony, and if necessary, bring in a family counselor and/or another advisor to facilitate discussion of unresolved issues before significant resentment, frustration and/or anger develops.
In our experience, planning and open and honest communication, along with a touch of compromise, compassion, and flexibility, are the hallmarks of (mostly) harmonious joint family property ownership.
Dana Reid is a trusts and estates attorney with 20 years’ experience advising clients on all aspects of estate planning, including business succession and intergenerational planning, and gift, estate, and generation-skipping transfer tax matters. Her work also includes charitable planning, with a focus on creating and supporting private foundations, nonprofit public charitable organizations, and charitable remainder and lead trusts. Dana can be reached at firstname.lastname@example.org or directly at 206-757-8116.