The Family Vacation Home

By Jim Gianelli

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How do you successfully pass the family vacation home on to your children?

As a foothills estate planning attorney, I have clients with beautiful vacation homes in Twain Harte, Pinecrest, Strawberry, Bear Valley and other mountain communities. Most of them first want to split ownership among the children, reasoning that “Our kids love each other and will work things out.”

But the kids do not always work things out, and leaving the family vacation home to them in equal shares is seldom a good plan. It leaves the children owning the property as “tenants in common.” And as I tell clients, ownership by tenants in common is akin to chaos.

The main culprit is the law of partition, which allows any disgruntled tenant in common the right to force a sale of the vacation home if the other tenants in common do not agree to buy out his or her interest.

Another issue is use of the family vacation home. Without a plan to the contrary, law allows any tenant in common the right to occupy the property free of rent, as long as he or she does not exclude any other tenant. Problems compound when dealing with expenses, such as taxes, insurance and repairs. Things can really become unmanageable in arguing over capital improvements and who pays for them.

And what if one child passes the vacation home on to a particularly troublesome in-law, either voluntarily at death or involuntarily as part of a divorce settlement? Or if one of the children is in major financial straits and the creditors want to take the vacation home?

There are two ways to deal with the above issues:

1. Create an agreement among owners (usually the parents and their children) which is binding on future generations. Often in the form of a tenants’ agreement or a limited liability company, this allows family members to create rules that reflect their values, history, personalities and hopes. Management, use and succession-of-ownership plans in such an agreement permit family values to predominate over individual values, thus allowing the vacation home to be available for generations to come.

2. Place the vacation home in an irrevocable trust with a chosen trustee or co-trustees (and methodology for selecting future trustees). Money for expenses and capital improvements would go into such a trust, and the trustee or co-trustees would make key decisions on use of the vacation home and how cash set aside for it is spent. This option is, admittedly, more dictatorial than the first.

Each solution has its advantages and disadvantages. Contact your estate planning attorney for details.

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