According to the National Association of Home Builders, in 2018, there were approximately 7.5 million second homes. That means up to 5.5 percent of the total number of homes are vacation properties.[1] These homes are not only real estate that you must plan for, manage, and maintain. They are also the birthplace of happy memories for you and your loved ones. Following are some significant estate planning questions to consider to ensure that you protect your place of happy memories. As an Austin estate planning attorney, I can help you answer these questions to achieve your legacy goals.
The fate of your vacation property at your death largely depends on how you currently own it. Perhaps you are the sole owner or you own it as a tenant in common with other people. In either case, you need to decide what will happen to your interest in the property. Suppose you own the property with another person as joint tenants with rights of survivorship. Or you own it with a spouse as tenants by the entirety. In that case, your interest will automatically transfer to the remaining owner without court involvement. You could arrange for a trust or limited liability company to own your vacation property. In that event, the entity will continue to hold the property after your death. The trust instrument or operating agreement may lay out additional instructions about what will happen at your death.
The wonderful thing about proactively creating an estate plan is that you get to decide. That is, you choose what happens to your money and property in a legally binding way. If you do not create a plan for your property (and if you do not own it via joint tenancy with right of survivorship or tenancy by the entirety), state law will decide for you. Each state has its specific laws and will require your loved ones to go 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. Note that owning property in a different states could lead to your loved ones having to open two probates. They would have to open one in the state where you lived at death. And another one in the state of the vacation property’s location. There are several different options for handling your vacation property.
This person may be your oldest child. Or it could be someone who has expressed interest in continuing to use the property. Or, perhaps it's an individual with the financial means to maintain the property.
Because your whole family enjoys gathering together now, you may wish for them to continue gathering at the vacation property after you pass away.
Because of the involvement of multiple parties, each with their own property interest and personal financial situations, an ownership agreement can lay out their rights and responsibilities.
The trust is the property’s owner when you die. So, 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. These could include how you want it 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. They can help you accomplishing this goal.
You may want to separate one property from the rest of your money and property. You may also want to manage it on its own if you have asset protection concerns. This trust agreement lays out each beneficiary’s specific rights and responsibilities concerning their use and enjoyment of the property.
Consider your objectives for the property. Moving it to a limited liability company may provide the beneficiaries with additional asset and liability protection. The company operating agreement may also specify each company owner’s rights and responsibilities concerning any company property.
Perhaps you believe that the money from the property’s sale would be of greater use to your beneficiaries. Or maybe none of them have expressed an interest in buying the property. Selling it can be an effective way to provide some money to benefit your loved ones differently.
While your family may have a lot of happy memories associated with your vacation property, you know that there are also a lot of responsibilities. When you leave your property outright to a person or group, 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.
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
First, you need to legally document your wishes to ensure that your loved ones know what your wishes are. This increases the chances that your family will adhere to your desires and that you have planned for most foreseeable situations. Second, suppose you have concerns about your beneficiaries being able to maintain the property financially. In that case, 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 ensure that you have adequately insured the property based on its intended use. Additionally, you may need 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 ensure you know of any potential tax consequences of transferring the vacation property, whether during your lifetime or death.
Please contact us to learn more about your options. We can help you protect your vacation property and ensure the fulfillment of your wishes for it.
[1] Na Zhao, Nation’s Stock of Second Homes, National Assoc. of Home Builders Discusses Economics and Housing Policy, Eye on Housing (Oct. 16, 2020), https://eyeonhousing.org/2020/10/nations-stock-of-second-homes-2/).
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