Inheriting a vacation home with your siblings can be a great thing or it can cause huge problems within the family. Planning ahead can help prevent sibling disagreements.
When siblings co-own property and one sibling wants to sell, that sibling can demand to be bought out. If the other siblings can't come up with the money to buy out the sibling, the sibling who wants out can force the sale of the house. This situation is not at all unusual and, unfortunately, can create a lot of hurt feelings. One owner has no interest in the property, while another has strong ties to it but can't afford to buy out the other owner or owners.
What different family members want can depend on many circumstances, such as whether they live near the vacation house or across the country from it, whether they have another vacation home of their own, whether or not they need the money, and even whether they have fond childhood memories of spending summers at the house.
The question for owners of vacation homes in planning their estates is the vision they have for the property. Do they see the property as binding their family together for generations to come as they continue to vacation together? Or are they more concerned about the issue of equity in that some children are unlikely to ever use the property while others may use it heavily? There is no right or wrong answer--just a question of the parents' values and goals.
The following are two estate planning solutions that are commonly used with regard to vacation homes:
- Direct that the property be sold. Parents can direct that the property be sold within a certain amount of time -- often a year -- after the surviving parent's death. Often, the children are given a right to purchase the property at a bit less than fair market value, called a 'right of first refusal.' If none of the children exercises this right by the deadline, the property is put on the market. This solution has the advantage of finality and equity. Each child gets his or her share and is not tied to the other children for years to come.
- Put the property in a trust. Usually, one or two family members are named trustees to manage the property for the benefit of all children and grandchildren. They can assess appropriate charges for use to cover the cost of upkeep and repairs (or the parent can leave money in trust for this purpose). This preserves the house for future generations. It also avoids probate. An irrevocable trust can also protect the property if the parents require nursing home care and must apply for Medicaid coverage.
- Put the property in an LLC. A limited liability company provides a superior structure for succession planning for management and it is easier to engage in estate planning for individual membership interests. The LLC's operating agreement can include rules for who can be a member (such as only blood relatives, if that is your desire) and how many votes are required to force a sale. If you put the property in an LLC now, your estate plan can direct who inherits your membership interest when you pass.
In short, there is no right or wrong answer. But a plan is almost always better than no plan. Contact us to create a plan that works for your family. There is no guarantee that all heirs will be happy with whatever decision is made. But in most cases, they will accept what their parents or grandparents decided to do with their property. And in terms of family harmony, it's often better that any anger be directed towards the parents who are no longer there than towards siblings who are still around.