THE 5 MOST IMPORTANT QUESTIONS TO ASK WHEN INVESTING IN A VACATION PROPERTY
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. These homes are not only a place of happy memories for you and your love ones, they must also be maintained. Whether you're in the market for a second home or are already a proud owner, understanding the nuances of ownership can help you get the most enjoyment – and value – out of your property. Here are five things to keep in mind.
WHAT WILL HAPPEN TO THE PROPERTY AT YOUR DEATH?
The fate of your vacation property after your death largely depends on how it is currently owned.
If you are the property’s sole owner, you need to decide what will happen to your interest in the property. This can be laid out in your estate planning documents.
If you own the property with another person your portion of the interest will automatically transfer to the remaining owner without court involvement.
If a trust or limited liability company owns your vacation property, the entity will continue to own the property after your death.
WHAT DO YOU WANT TO HAPPEN TO THE PROPERTY AT YOUR DEATH?
One of the many perks of having an estate plan is that you get to choose, in a legally binding way, what happens to your money and property. It is important to note that, if you do not create a plan for your property (and if it is not owned in joint), your state will decide for you according to its probate process. Probate is the court-supervised process that winds up your affairs and distributes your money and property to the appropriate people. It's also worth noting that having property in a different state than your primary residence might result in the need for two probates (one in the state where you resided at death and one where the vacation property is located). Through proper planning, you get to dictate what you want to happen to your vacation property, here are your options.
Give the property outright to a loved one. This person may be one of your children, someone who has expressed interest in continuing to use the property, or anyone with the financial means to maintain the property.
Leave the property to a group of people. If your whole family likes to get together, you may want them to continue doing so at the vacation house after you're gone. You can do this by designating a group of people in your will to take ownership of the property. This raises its own set of questions that will be discussed later.
Give the property to a group of people as tenants in common and create an ownership agreement. Because there are multiple parties involved, each with their own personal interest and financial situations, an ownership agreement can lay out each one’s rights and responsibilities regarding the vacation property. An estate planning attorney can help you create this document.
Transfer the property to your revocable living trust to be held for a long period of time or indefinitely. Because the trust is the property’s owner when you die, it is used as a guide to see what happens. There will be no need for probate, and you can specify any rules you may have for the property and how it is to be held. You could transfer the property to another type of trust as well for a similar outcome. This will need to be done before your death. It's important to note that some states have laws that may limit how long the trust can remain in effect. If you want the trust to hold the property indefinitely, speak with an estate planning attorney about how you could accomplish this.
Transfer the property to a limited liability company to be held for a long period of time or indefinitely. Much like the previous option, this needs to be done before your death. Transferring it to a limited liability company may provide the beneficiaries with some additional asset and liability protection. The company operating agreement may also specify each company owner’s rights and responsibilities with respect to any company property.
Instruct your trusted decision-maker to sell the property. If you believe that the money from the property’s sale would be of greater use to your beneficiaries or that none of them would want to buy the property, selling your property can be the most beneficial option for your loved ones.
CAN YOUR BENEFICIARY AFFORD THE VACATION PROPERTY?
Along with happy memories, your vacation property will also come with some large responsibilities. When you decide to leave your property to a person or group of people, they will become responsible for financial obligations such as any possible mortgage payments, utility bills, and property insurance and taxes. If you wish your beneficiary to keep the property, it may be smart to consult with them about their ability to keep up with these financial responsibilities; if not, they may end up selling the property.
IF MORE THAN ONE PERSON WILL HAVE AN INTEREST IN THE PROPERTY, DO THEY ALL GET ALONG?
Your children may get along now, but will they always be able to see eye to eye? Owning property together means that they need to be able to equally contribute to the property financially and physically. You can address these issues in your estate plan by outlining
Everyone’s responsibilities regarding the property,
Describe everyone’s rights to the property,
Choose who will make the most critical decisions,
What to do if a dispute arises, and
How someone can walk away from the property if they no longer want to be an owner.
HOW DO YOU INCORPORATE YOUR WISHES INTO YOUR ESTATE PLAN?
You need to begin by legally documenting your wishes so your loved ones can know what your wishes are. Second, if there are concerns about your beneficiaries being able to financially maintain the property, consult with them to discuss the responsibility and meet with a financial advisor to design a plan that allows you to set aside money for its maintenance. You will also need to meet with an insurance agent to make sure that the property is properly insured based on its intended use. Finally, you should meet with your tax adviser to make sure that you know of any potential tax consequences of transferring the vacation property, these could occur during your lifetime or at your death. If you want to learn more about your alternatives for safeguarding your vacation home and having your wishes fulfilled, talk to one of our experienced estate attorneys by calling us at (614) 389-9711.
 Na Zhao, Nation’s Stock of Second Homes, National Assoc. of Home Builders Discusses Economics and Housing Policy, Eye on Housing (Oct. 16, 2020), https://eyeonhousing.org/2020/10/nations-stock-of-second-homes-2/).