3 Things You Need to Consider for Family Vacation Home Succession Planning
Your family vacation home is your sanctuary. Whether you have been going there since you were a child or created the tradition later in life to give your children a fun getaway, a family vacation home is where memories are made. For that reason, many families want to extend the experience of their family vacation home beyond their lifetimes for the enjoyment of generations to come.
In order to facilitate and ensure your vision comes to reality, here are the 3 things you need to consider to create a family vacation home succession plan:
Ownership: who will inherit the home and in what manner?
What entity will the home be held in? Will each owner have an equal share? What is the process if family members want to sell? What happens if there is a family dispute? What happens if a beneficiary cannot afford to pay his or her fair share of expenses? What happens if a beneficiary gets divorced, sued, or has other creditor problems? Can you force the sale of a person’s ownership share?
Do not take these questions lightly. The most common response I hear to these questions is that all the kids get along and they’ll figure it out when the time comes. Do not make that assumption. If your family gets along well and you want to keep it that way, then you need to put your instructions in writing and make it absolutely clear how the ownership structure for the family vacation home works in advance of any problems arising (because they will).
The most common reason I’ve seen families fall apart is a disagreement over real estate. In such a scenario, 9 out of 10 times there is a family member (or the spouse of a family member, aka the “in-law”) that causes the whole thing to go sideways.
To prevent your family vacation home from being caught in the crosshairs, ownership succession is typically structured in one of two methods:
You give the right of first refusal (generally, triggered upon your death) to the family and allow those children interested in the family vacation home to opt in to using their share of their inheritance to own the family vacation home (whereas those who didn’t opt in are then cashed out from the other family members buy-in).
You give each child’s household (“family unit”) a share and you fund the trust with enough money to cover maintenance and operating costs of the family vacation home to ensure each family unit is covered. This is especially important if each family unit has different financial means and/or plans to use the home less than the other family units due to geographic, time, or interest constraints.
When it comes to succession planning, many family vacation homes are placed in LLC’s, family partnerships, and/or in a trust to create legally enforceable provisions and protections. For example, in the event someone gets divorced, you don’t want to see that share get caught up in court so, to prevent that, you would have a buy-sell provision in place to navigate the situation in a private manner. Since 50% of marriages in the US end in divorce, and since there are a dozen other events that may require a forced sale or shift in ownership, the buy-sell provision (or provision in a trust that creates a similar effect) can be used to prevent the family vacation home from becoming a litigation nightmare.
2. Management: how will the family vacation home be managed?
Management covers all the operational concerns with a family vacation home, such as:
Can the home be rented? If yes, will income go towards maintenance? If income exceeds maintenance expenses, what will happen to the surplus cash on hand?
Who will decide how the home is decorated, landscaped, and improved upon? Who will make decisions on hiring and coordinating contractors?
Who will be in charge of paying the bills, managing the books, dealing with lawyers, accountants, and property managers?
If an operational issue arises, how will family members resolve the dispute? Majority, super majority, outside arbitration?
Will family members be compensated for taking on a particular role? If yes, how will that compensation be structured?
Similar to the ownership structure, you typically see the management function designed in one of two ways.
One person (the most able and willing of the children) will be the ultimate decision maker and in charge of everything (including delegation), but will informally rely upon the opinion and advice of other family members.
The above management roles are divided among the children, with each one opting to take a particular role.
In both scenarios, the voting mechanism is typically that each family unit has one vote and can decide within that family unit who will be their representative. Whether it’s majority or supermajority often depends on how many family units are involved. In extreme situations, a private arbitration clause is usually inserted as a backstop.
In terms of compensation, sometimes the person in charge of a particular role is happy to be in control over whatever function he or she is responsible for. If one person is doing most of the work, then that person could be compensated by having first choice on scheduling. In other words, you can use perks to compensate certain family members rather than cash if you think it is more appropriate for your scenario.
3. Usage: how will the family vacation home be used?
There should be clear ground rules for the family vacation home.
Are pets allowed?
Are guests allowed and under what circumstances?
What about family friends when no one else is using the place?
Can grandchildren stay without first generation supervision? Under what conditions? Can they bring friends?
How will scheduling work?
Shared online calendar?
By week or by weekend?
How many family units at a time (depending on the size of the home)?
How will prime weekends be handled?
If something is broken, who is responsible for fixing it?
How should the home be left after a person’s stay? Think about laundry, dishes, general cleaning, food in the fridge, items that may need to be restocked, etc.
If you can knock out the above questions and put them in writing that everyone can agree to, then you just need to put together the proper legal documents to complete your family vacation home succession plan.
If you have any questions about how to put such a plan in place, then give me a call at 781 202 6368 or email me at jlento@perennialtrust.com.
I’m always happy to help,
Joseph M. Lento, J.D.
Your local estate planning attorney
Perennial Estate Planning
477 Main Street
Stoneham, MA 02180
