Dynamics of Purchasing a Vacation Home in Retirement
Family vacation homes often provide a retreat for you and your family to gather and enjoy one another’s company. The home brings not only emotional attachment but also unique planning challenges. Parents or grandparents often desire to have the next generation make their own memories while spending time at the family vacation home. As a result, they make plans to leave the property to their heirs, which can lead to multiple ownerships of the property among children, grandchildren, or even spouses.
While the intentions of the parents may be for the vacation home to provide an avenue for the family to stay connected, it may also create unintended family tension. For that reason, it is important for owners of the home, or multiple real estate properties, to be practical in their assessment of family dynamics and the practicalities of having the next generation own and manage the property.
Keeping Property in the Family
The first question that many parents forget to ask themselves is, “Do my children or grandchildren want to keep the property in the family?” The original goal may have been for the parent or grandparent to provide a safe haven for their family to go to and reconnect. However, your kids or grandkids may not feel the same way. They may view the property as a burden to upkeep and manage, especially if the property requires great lengths to travel to it. For this reason, you should have a discussion with your family in order to determine the interest the next generation has for owning and using the property. After having that discussion, assuming you move forward with purchasing a vacation home, then the next step is to determine the best way to leave the property to them.
Outright transfers of a family vacation home are one of the simplest methods for transferring ownership. However, this method does not always equate to be the most effective. This option lacks structure for management of the property. Your children are left to develop a plan for its use and provide the funds to maintain the property. Each family member has the right to leave the property to whomever he or she wishes. In addition, a disgruntled family member could force a sale of the property by way of a court order. This could cause conflict for other family members who want to keep the property so their kids can experience the same joy they felt growing up.
Transfer on Death (TOD) Deed
A transfer on death (TOD) deed is a special type of deed that can be used to transfer ownership of real estate outside of probate. If avoiding probate is the main goal, this can be one of the most cost efficient and effective ways upon transferring assets at death in addition to living trusts. Be careful here, not all states recognize the TOD deed.
Qualified Personal Residence Trust (QPRT)
If the parents wish to gift the property all at once in a tax efficient manner, then it may make sense to use a Qualified Personal Residence Trust (QPRT). The property is transferred to an irrevocable trust, with the use and ownership retained by the parents for a term of years. Once that term is completed the property is either left outright or continues in trust for the benefit of the next generation. While the QPRT may be effective for tax planning, it doesn’t come without its own flaws. There is a risk of losing the transfer tax benefits if the grantor does not outlive the QPRT term. A QPRT should be considered only in cases where the family is fairly confident, that for the foreseeable future, they wish to retain rather than sell the property.
Limited Liability Company (LLC)
The use of a Family LLC is another way of transferring vacation homes to the next generation. Interests are gifted over a period of years, using the annual exclusion ($15,000) for taxable gifts. There are several advantages to this structure. Many vacation homes involve outdoor activities where participants could become injured. Owning that property via an LLC puts one additional layer of protection between your personal assets and any potential creditors. An LLC structure also allows you to gift small portions of the property without necessitating a change in titling with the county. Another benefit is that proper titling of the LLC units can avoid probate on that property, or even worse, ancillary probate if the property is located in a different state. Most importantly, the LLC provides a clear and flexible framework for transferring a family vacation home to the next generation.
An LLC will require an operating agreement that serves as a blueprint for managing the property. The agreement designates managers of the property who are in charge of collecting money from members, paying expenses, and making decisions about repairs. Also, the operating agreement will provide the procedure for transferring ownership of shares and selling any interest in the property. While an LLC form of ownership may require upfront costs, it is an effective way for transferring family vacation homes to the next generation and beyond.
Purchasing a Vacation Home in Retirement: Does It Make Sense for You?
You should be certain there is sufficient interest from the next generation in retaining such ownership before purchasing a family vacation home. If there is sufficient interest, you should consult with a qualified estate planning attorney about the most appropriate method for transferring the property to the next generation. This can help you and your heirs enjoy the property without its ownership becoming a financial or emotional burden.