The Family Vacation Home

Parents’ intentions to pass them on for multiple generations are often frustrated

By: Robert J. Kurre, Esq.

The vacation home is a much prized but often overlooked asset of the family for estate planning purposes. When the summer months roll in, the vacation home is a destination to be cherished with an opportunity for family members to spend time together in a relaxed atmosphere and grow closer. Sand, sun, surf and fun are some of the many positive memories that resonate among those enjoying vacation or summer homes. Family is what makes these getaways most memorable, and, often, the hope is to have the children, grandchildren and future generations enjoy the home for many years. However, this wish often never comes true.

Due to poor planning or a lack of planning, the home is often enjoyed harmoniously by the family only for a relatively short period of time and becomes the cause of conflict and disharmony among the children when the parents die.

Most parents will simply designate in their Last Will and Testament that they are leaving their family vacation home, upon their death, to their children, in equal shares. This means that the children now directly own the property as tenants in common. If the vacation home is passed down to the children as tenants in common, a myriad of problems can easily arise. Divorce, death, financial restrictions, debt, ownership squabbles, and divergent interests can all create a series of unwanted problems. For example, if one child dies, his or her spouse may inherit a share in the house and then re-marry. The spouse’s new partner, or his or her children from a prior marriage, could end up owning an interest in the house if proper planning is not done. As an additional example, if one of the children cannot afford to contribute to the upkeep of the property, the other children may be forced to commence a lawsuit to resolve the situation. The result can very well be hurt feelings, or even worse, irreparably damaged familial relationships, and a forced sale of the home which does not bring back fair market value. With proper planning, the vacation or summer home can be kept for what it is – a vacation, or pleasurable time away from home, which serves to keep the family close.

To best plan for a vacation or summer home, it is often advisable for the home to be owned by a legal entity established by the individual or individual who originally purchased the home. This will best foster the parents’ intentions for it to be enjoyed for many generations. Many of these entities are established as limited liability companies (“LLC”). The LLC owns the home, its furnishings and accoutrements. The children do not have a direct ownership interest but are instead given a membership interest in the LLC. The LLC’s operating agreement governs the rights and responsibilities of its members and details how various situations will be dealt with to minimize conflicts between family members. For example, if one child decides to no longer contribute to the upkeep of the property (or is financially not in a position to do so), the operating agreement can set forth the consequences, such as, loss of use of the property and, eventually, relinquishment of that child’s membership interest. As a further example, the operating agreement can set forth restrictions on whom interests can be transferred to and how members will be dealt with if they want to sell their interests. The sale could be prohibited to include only the other members. The operating agreement should also deal with issues, such as, use and occupancy among members and any time that will be carved out for rental to non-members.

A properly drafted operating agreement provides the ground rules to foster a harmonious use of the property which is lacking in the tenant in common ownership structure discussed above. These types of arrangements are best established under the guidance of a qualified attorney who concentrates in estate planning.