Over the River and Through the Woods . . .

It is becoming more common these days for families to own vacation homes. Often, these second homes become the center of a lifetime of fond memories for generations. In many cases, the sentimental feelings attached to these vacation homes are more pronounced than the feelings attached to the family’s actual residence. It’s not hard to see why.

In our regular homes, kids do homework, complete chores, get disciplined by parents, etc. But at a vacation home, parents tend to relax, kids make fun memories with aunts, uncles, cousins, and siblings. There are often fun activities and lots of good food that go along with the time spent there.

Over the holidays I had the opportunity to spend a few days with my family at just such a vacation home. It was hard to come back to reality after that weekend, but I so enjoyed watching my kids have the time of their lives with their cousins playing in the snow, wrestling, playing hide and seek, beating their uncles in checkers and more.

As an estate planning attorney, I am regularly asked how to best plan for the passing on of such vacation homes. Sometimes, the children and grandchildren have all moved so far away from the home that it’s unrealistic to expect that they’ll be able to utilize the home more than once every few years. In such a case, it doesn’t make much sense to try to maintain the home all year long for a week long visit.

In other cases, after the original owners of the home have passed away (mom and dad for example) the children or grandchildren do not have the kind of money to maintain and pay taxes on the vacation property. And despite their strong feelings for the home, they must simply sell it and divide the proceeds.

However, there are a number of creative ways to ensure that the home stays in the family for as long as is practical. In some cases, it might make sense to use a trust. In such an arrangement, the home is owned by a trust and the trustee maintains it with the cash assets in the trust. In the weeks that the home is not being used by family members, the trustee (or a property management company hired by the trustee) rents the property out to other vacationers. That money can then either be used to maintain the home, or if sufficient, can be paid out to the beneficiaries of the trust (the family members).

Another device commonly used for this sort of thing is an Limited Liability Company (LLC). The benefits of transferring a vacation property (or properties) to an LLC can include (1) clear directions on how to divide up profits from rental of the property, (2) how to deal with the exit of an LLC member either because of death or because the member no longer wants to use the vacation property, (3) enhanced protection from lawsuits against the property owners, (4) as well as potential tax benefits that accrue to some or even all of the members of the LLC from owning the property in this way.

For additional information on this type of planning, the Wall Street Journal recently published an article that you may find helpful. If you love your vacation home and don’t want to see it become a bone of contention among family members as your family matures, it would be well worth your time to discuss some of these options with your attorney and tax advisor. Your family will thank you for it!