Vacation homes are often the center of cherished family memories. We are fortunate in Massachusetts to be close to beautiful vacation spots such as Cape Cod, the Berkshires, or the lakes and mountains of northern New England. Keeping these family treasures for future generations requires careful planning. Not surprising, there is no one-size-fits-all planning option to transfer ownership to future generations. Planning to pass the treasured family vacation home to the next generation also needs to include creating a framework for “governance issues” such as: covering maintenance and capital expenditures, usage rules, scheduling, setting withdrawal rules if a child wants out of ownership, and establishing transfer limitations to non-family members. Several planning options are available to keep the vacation home in the family.
Gifting to your children
The advantage of gifting of the property is that the vacation home would avoid probate; but there are many downsides:
• The older generation gives up control of the property and now it is subject to the reach of the younger generation’s creditors or even ex-spouses.
• The older generation’s property tax basis may not carryover. Individuals who receive real estate gifts have a tax basis in the property that is equal the price the older generation paid. When the children inherit the property at a person’s death, the property’s tax basis is “stepped up” to the value of the property at the time of death.
• Outright gift of the property to your children in equal shares as tenants in common can be problematic. What if a child dies, who inherits his or her share? Do your children want to share ownership with their sibling’s spouse or children.
Transfer through the use of Trusts
Another option is to transfer the property to a Trust. The Revocable Trust holds legal title to the vacation home with the parents creating the trust, called Grantor(s), retaining control over the property. The Grantors can name a trustee to manage the property when the property passes to the children upon the death of the Grantor. The Trust can be structured to restrict ownership to family members only, protect the house from creditors and failing marriages, and provide rules for future use and ongoing management. Vacation homes held in this type of Trust will get a step up tax basis when it’s passed to the next generations upon the grantor’s death.
Family Limited Liability Company (FLLC)
A third option is to create a Family Limited Liability Company, or Family Limited Partnership. The parents create the FLLC and transfer ownership. Over time, ownership can be transferred to the younger generation even while the parents are still alive allowing for life-time gifting. The FLLC can create an operating agreement that includes governance of the FLLC and can be drafted to meet family goals such as use and operations, restrict ownership to only family members, and create buyout terms should a child want to sell their share.
Passing a vacation home to future generations is a wonderful, timeless legacy to leave your family. Choosing how to pass it on is a complex process with many variables. Working with a qualified Estate Planning attorney, such as the attorneys at Generations Law Group, with offices in Acton and Sudbury, MA, about the most appropriate method of transferring the property to the next generation is critical to keeping the property in the family.