According to the National Association of Home Builders, in 2018 there were approximately 7.5 million second homes, making up 5.5 percent of the total number of homes.[1] These pieces of property are not only real estate that must be planned for, managed, and maintained, they are also the birthplace of happy memories for you and your loved ones. Here are some important estate planning questions to consider to ensure that your place of happy memories is protected.
Deciding the Fate of Your Property
The fate of your vacation property at your death largely depends on how it is currently owned. You need to decide what will happen to your interest in the real estate. This will largely depend on if you are the sole owner or if you own it as a tenant in common with other people.
What will happen after your death?
If you own the property with another person your interest will automatically transfer to the remaining owner without court involvement. If a trust or limited liability company owns your vacation home, the entity will continue to own it after your death. The trust instrument or operating agreement may lay out additional instructions about what will happen at your death.
What Do You Want to Happen?
Proactively creating an estate plan allows you to choose what happens to your money and real estate. The wonderful things is it is legally binding. It is important to note that, if you do not create a plan for your property your state will decide for you. This process involves putting your loved ones through probate.
Probate is the court-supervised process that winds up your affairs. It also distributes your money and property to the appropriate people. It is also important to note that owning real estate in a different state from where you reside could lead to your loved ones having to open two probates.
Options for handling your vacation property:
- Give the property outright to a loved one
- Leave the property outright to a group of people
- Give the property to a group of people as tenants in common and create an ownership agreement
- Prior to your death, transfer the property to your revocable living trust to be held for a long period of time or indefinitely
- 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 about how to accomplish this goal.
- Prior to your death, transfer the property to a special trust that owns only the property to be held for a long period of time or indefinitely
- Prior to your death, transfer the property to a limited liability company to be held for a long period of time or indefinitely
- Instruct your trusted decision maker who will wind up your affairs to sell the property
Can Your Beneficiary Afford the Vacation Property?
While there may be a lot of happy memories associated with your vacation property, there are also a lot of responsibilities. Whoever you leave your property to will become responsible for the financial obligations. If you wish your beneficiary to keep the property, you need to consider whether they can meet the financial obligations. In the event that they do not meet the obligations, they may end up prematurely selling it.
Do Your Beneficiaries All Get Along?
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 real estate 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
- everyone’s responsibilities with respect to the property,
- everyone’s rights to the property,
- who makes the decisions,
- what to do if a dispute arises, and
- how someone can walk away from the property.
What Should You Do to Make Your Wish a Reality?
First, you need to legally document your wishes. This ensures that your loved ones know what your wishes are and that they will be followed. It also documents that all possible scenarios have been planned for.
Second, if you have concerns about your beneficiaries being able to financially maintain the property you need a plan. It is recommended that you meet with a financial advisor. The financial advisor will help you design a plan that allows money to be set aside for its maintenance. Also, you need to meet with an insurance agent to make sure that the property is properly insured. You may also need to acquire additional life insurance as another source of financial liquidity for its maintenance.
Finally, you should meet with your tax adviser to make sure that you know of any potential tax consequences of transferring the vacation property, whether during your lifetime or at your death.
If you are interested in learning more about your options for protecting your vacation property and having your wishes for it carried out, please contact us at (949) 333-3702 or click the button below.
[1] Na Zhao, Nation’s Stock of Second Homes, National Assoc. of Home Builders Discusses Economics and Housing Policy, Eye on Housing (May 13, 2022), https://eyeonhousing.org/2022/05/the-nations-stock-of-second-homes/).
