Planning for the Family Vacation Spot – Part 2

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Gary Fitzgerald’s Newsletter, Let’s Talk About……

In our last newsletter, we discussed some of the problems that can arise from joint ownership of cabin or vacation property. Creditor issues, asset protection, management, expense reimbursement, capital improvements and decisions over who uses the property and when, all can prove to be difficult issues when there are no family guidelines in place.

In this article, we will take a look at some common strategies for avoiding these types of problems.

Comprehensive Plan for Management and Use

Probably the most important aspect of any plan for a cabin or vacation home is to lay out the basics in a written document. Issues that should be addressed include the following key areas:

1.Use

Certain properties are more desirable during certain times of year. Families with children likely will want to use the property during school vacations. Beach properties are more desirable in the summer as are ski properties in the winter. Sooner or later, there are bound to be conflicts.

A good plan will answer questions like these:

Who gets to use the property, when and how often? What happens in the event that more than one family member or group wants to use the property? What if someone is scheduled to use the property and then can’t due to some family emergency or last minute scheduling conflict?
Can the property be rented to an outsider during a family member’s turn of occupancy? Who is responsible for arbitrating or mediating occupancy and other problems?

  1. Management

Any property of value needs management. Someone needs to make sure that property taxes and insurance bills are paid, that maintenance is performed as needed and occupancy schedules are managed. If improvements are necessary or desired, someone will need to make sure that competitive bids are obtained and that the work is finished in good time and good order.

This can be done by a committee or by a single person appointed to the task. In some cases, it can be performed by a professional management company that is paid to do this type of work.

  1. Costs

An issue that often causes problems is the issue of who is responsible for paying for use, upkeep and management of the property.

Inevitably some family members use a vacation property more than others. Should they be required to foot more of the maintenance expense?

What about capital improvements? Also, who decides which expenses are necessary and which are more in the category of optional?

Once you have asked and answered the many questions listed here, you can begin to look at the best form of ownership for your family and the family property.

The Three Main Ownership Choices

There are three main choices for ownership: fee simple, trust owned and entity (limited liability company, limited partnership, corporation). Let’s take a look at some of the advantages and disadvantages of each.

Fee simple.

This means that each family member owns a fractional interest in the property. The advantage to this form is that it is very simple in the beginning. Most of the family members who inherit are likely to be close (siblings) and may be able to work things out. This form of ownership is even better when there is a comprehensive agreement in place as to all of the items listed in the first half of this article. (use, management and costs)

The downside is that over time, ownership gets more fractionalized as the property passes to grandchildren and great grandchildren etc. and decisions can be much more difficult to make and enforce.

Another potential issue with joint ownership involves creditor protection planning. In the event that one of the joint owners is sued, a creditor could conceivably force a sale of the property to satisfy a judgment against even only one of the owners. Obviously not a great result.

Trust Ownership.

This type of ownership has the property owned by a trust. The trust will have trustees who are responsible for managing the property and the trust document will usually spell out the guidelines for use, management and costs. The advantages include a clear choice for management succession and a clear set of guiding rules that can be used in the event of disagreements or disputes.

Trust ownership can have significant asset protection advantages over joint ownership. Usually courts are unwilling to sell property owned by a trust to satisfy the debt of a beneficiary. This means that the remaining beneficiaries will not suffer as the result of the misconduct of one of their fellow beneficiaries.

Entity Ownership.

Over the last 10 years, there has been a trend to own cabin or vacation property in an entity, such as a limited liability company (LLC). As with a trust, the entity operating agreement often addresses all of the issues that can come up with ownership of a cabin property. In addition, you may provide for successor management and other provisions that make sense in your particular situation.

Unlike trusts (which in some jurisdictions must end after a certain period of time) LLCs can be formed to last forever.

Like trusts, LLCs can also provide good asset protection attributes. However, this protection varies from state to state so you will need to make sure of the law in the state where the LLC is formed and potentially where the property is located.

On the negative side, LLCs often require annual fees and filing requirements and can be terminated by state action in the event of a failure to comply with any of the state rules. Usually these problems can be cured, but the added layer of expense and compliance may prove burdensome.

Funding for the Future

It is our experience that money tends to be the biggest problem with keeping a vacation home in the family to be enjoyed over many years.
Therefore, you may want to consider the formation of a sort of endowment for the property.

One way to do that is to simply establish a fund at death from other assets that is dedicated to cabin upkeep, management and improvement.

Another way to do it is to purchase a life insurance policy that pays into a maintenance fund when you die.

Either way, the trust or operating agreement can be written so as to spell out how the money is to be used and who has the ultimate decision making power when it comes to spending.

As in all planning around important issues such as these, it is best to work with experienced advisors who can help you think through these issues.

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