Considerations in Owning a Family Vacation Home

Owning a family vacation home can be one of life’s great pleasures. Whether it’s a cottage in the woods, a house on the coast or a condo in a distant city, a second home may be anything from an occasional retreat to a treasured asset held in the family for generations.

Family conflicts and other complications, however, can easily arise if sentiment is allowed to crowd out practical and financial considerations in a decision to buy, retain or sell a vacation home. Careful planning is essential if you want to pass the property to heirs.

An effective plan for multi-generational ownership of a vacation home should take governance, liability protection and estate planning into account. Several factors are particularly important to remember:

Make family communication a priority.

Before buying or planning for the future of a family vacation home, make sure your expectations for family unity and mutual cooperation are realistic. Have a frank family discussion about options for the property and find out everyone’s expectations. Consider your children’s vantage point; they may not all be willing or able to weigh in honestly or objectively. Do they want to preserve the tradition for generations to come, or would they prefer the cash from selling it once you’re gone? Are all the siblings and their spouses committed to the long-term plan?

Consider all financial implications.

Sentimental asset or not, a decision on whether to own or sell should start with a numbers-crunching look at the financial implications for all options under consideration. Even if you view a property as more heirloom than asset, this will help take some of the emotion out of the process. It also can put the home’s worth in perspective as a percentage of an overall estate.

If you see the home as a legacy property, is it big enough to accommodate the family for years or should the cost of a future expansion be factored in?

Put all expectations and rules in writing.

Draw up guidelines for how the vacation home should be used and maintained. The guidelines should lay out rules for scheduling and use of the home while also discussing how maintenance, repairs and operating costs will be handled and paid for. Consider specifying individual obligations to a separate account, and/or prefunding it. Agree on a process for family members/shareholders to opt out of their ownership; consider establishing a buyout fund.

Define circumstances under which the property can be rented out. Some family members may not be able to contribute to a maintenance fund without rental income. Be sure you are prepared to obtain appropriate liability protection. Insurance for vacation homes can be expensive and difficult to obtain.

Develop a succession plan.

Establish a clearly articulated plan for transferring the home to future generations. Without sufficient specifics, it may end up in the hands of your child with the most money or the one who lives closest to it, resulting in a legal wrangle.

A transfer by will or deed may seem the easiest option but often leads to family friction. Creating an irrevocable trust or a family limited liability company may work better.

Consult both your attorney and your financial adviser.

Discuss the different options with professionals. Take precautions for all legal and tax consequences. There are many complexities to address, especially with trusts and LLCs. Work with the pros to create or amend an estate plan that clearly reflects the family’s preferences.

The successful ownership, transfer or sale of a family vacation home depends in large part on diligent preparation. Arm yourself with ample information, communicate honestly with other family members and consult with experts in order to reach the best decision possible.

The material shown is for informational purposes only and should not be construed as accounting, legal, or tax advice.  Altair Advisers LLC is a registered investment adviser with the Securities and Exchange Commission; registration does not imply a certain level of skill or training.  While efforts are made to ensure information contained herein is accurate, Altair Advisers cannot guarantee the accuracy of all such information presented.