3 Options for Protecting Your Vacation Home in the Future
Ensuring assets are available for future generations to benefit from is often a major goal of estate planning. But if you don’t discuss your goals and objectives with your estate planning attorney, things can go wrong when you die and when the time comes for estate and trust administration. Your planning documents must leave directions and the right amount of liquidity to manage assets that you want to preserve for future generations.
Real estate may play a critical role in your estate considerations. You might be able to protect some of the equity of your primary residence with a homestead exemption, but what about a vacation home? If you want to ensure grandkids and great-grandkids can make memories on that property, it’s important to consider how to do that now.
What Factors Impact Your Options for Protecting Your Vacation Home
Before you can choose a method to protect your vacation home, you’ll need to consider some factors. For example, who actually owns the property, according to the registry of deeds, matters. If you hold it jointly with anyone else, you may only be able to plan for the portion of the property that you own.
Where the home is located matters too. If you own vacation property outside of your home state—or outside of the country—you may need to consider the impact of the estate and property laws in that location.
Finally, the operating costs of the home must be considered too. For example, funds must be available to cover the costs of real estate taxes, homeowners insurance, and maintenance and repairs. Whatever planning tool you choose to implement, it is important that you provide for the funds needed to pay anticipated expenses. Some people will use a life insurance policy to provide the funds needed to cover the carrying costs of the property for many years. While most families will expect the children who are inheriting the property to pay the carrying costs, there are times when the children may not have the means. So planning for alternatives becomes an important part of the process – to make sure that the property is not lost, or that a sale is forced at an inopportune time.
You should also consider what type of options you want your heirs to have in the future. Part of the reason for working to protect a vacation home is that you don’t want one person’s financial situation or feelings about the property to cause it to be sold or lost. However, what if something changes for the entire family and all the future heirs agree that it’s no longer a valuable asset? Understanding how real estate is transferred from a trust or sold when it’s owned by an LLC can be important so you can create “exit” strategies that provide options for heirs without putting the property at undue risk.
Some Ways to Ensure Your Family Has Access to the Property for Generations
There are many ways to protect real estate, such as a vacation home, for future generations. Various types of trusts or LLC ownership are some potential options.
Spousal Lifetime Access Trust
A Spousal Lifetime Access Trust, or SLAT, lets you remove assets from your taxable estate while ensuring your spouse retains some type of access during your lifetimes. Basically, it works like this:
- The owner of the vacation home creates a SLAT and transfers ownership of the vacation home to the trust.
- Their spouse has lifetime access to the benefits of the SLAT, which in this case is the use of the vacation home.
- Any children or grandchildren have access to use the property at the spouse’s invitation.
- When the person who created the SLAT passes away, the spouse retains the benefit of access to the vacation home.
- When the spouse passes away, the remainder beneficiaries retain access. These are usually the children or grandchildren of the couple doing the planning, but that may depend on how you set up the trust and who you named.
There are some potential downsides to a SLAT. Most have to do with what happens if you get divorced or if your spouse passes away before you do. But a skilled estate planning attorney can usually draft around these problems. Having some provisions in place to ensure the vacation home remains in your family can be important.
Domestic Asset Protection Trust
A Domestic Asset Protection Trust, or DAPT, is similar to a SLAT in that it provides you with options for protecting your vacation home while also continuing to benefit from the property. In this case, you can create a trust and transfer ownership of the property to it, but also name yourself as a beneficiary. However, for Massachusetts real estate, a DAPT is not recommended.
Transferring a vacation home into an LLC has many benefits. Your revocable trust will own your LLC while you are alive. At your death, your trust will transfer the LLC to as many family members as you wish. LLC ownership provides a variety of protections, including limiting each person’s potential liability in the event of accidents on the property and protecting the home from an heir’s divorcing spouse or against future creditors of an heir. This may be a great option if you plan to rent the property out part of the time. Remember, when you leave a rental property to more than one person, you are forcing all of those people into a business relationship. So structuring the real estate and the funds needed to maintain the property as a business while you are alive becomes very important. Even if the property is used solely for family use, you are still directing your family to maintain an investment together. While we don’t usually think of a vacation home as an investment asset, it is common for some of the family members to “want out,” so structuring your LLC and your estate plan in a way that permits flexibility is critical.
You do need a strong operating agreement for the property to ensure all the various owners understand how the property should be managed and what their responsibilities are. The agreement should cover details such as how operating expenses are paid, how ownership rights in the LLC should be transferred, and scheduling for use of the property.
Reach Out to Find Out How We Can Protect Your Vacation Home and Other Assets
Protecting your vacation home and ensuring future generations can benefit from it is possible with solid estate planning. Find out more about securing your vacation home for the future or protecting other assets for your heirs by making an appointment with the team at the Law Offices of Boyd & Boyd, P.C. You can reach us by calling 508-444-9688.