Vacation Homes: Keeping Them in the Family

Family cottages are special places, used by generation after generation, to be filled with new memories and new additions to the family. Parents who work hard to buy a vacation place often cherish the idea of keeping the property in the family, so their children and their children's children can share lazy summer days or cozy fireside gatherings. Without proper planning, though, this blissful dream can quickly become a nightmarish reality.

Because many cottages and vacation homes are owned free and clear of mortgage debt, they often represent a substantial part of an owner's estate—and can therefore become a source of interfamily strife. Here's some advice on steps to take to lessen the chance that your heirs end up fighting over how to deal with the property.

The Cottage Tug-of-War

Unfortunately, too many cottages and vacation homes go from happy idylls to combat zones, with forced sales, severed relationships, and an exasperated heir declaring to siblings: "I am tired of dealing with attorneys and all of you. I want out now!" Even in seemingly harmonious families, it is difficult to predict how siblings will relate to one another once the parents are not around to mediate disputes. And disputes do arise, largely because the perceived value of the vacation home differs from heir to heir.

To some heirs, the prospect of using the cottage is more desirable than its cash value. Heirs of modest means, on the other hand, might be counting on their share of the value of the cottage to pay debts or put their kids through college. Stepchildren and spouses who did not grow up at the lake or seashore often have weak emotional ties to the cottage but strong interest in its cash value. All of this sets the stage for trouble.

Families who don't have a plan for the family cottage, or who rely solely on a traditional estate plan, leave their families vulnerable to turmoil.

Estate Planning for Family Vacation Homes

The difficulties of passing on a vacation cottage while keeping peace in the family aren't just legal; they're emotional and even sociological. (Getting everyone to agree on how property should be used and maintained is never easy.) But there is one key legal problem you must understand: Generally, any co-owner can force the sale of real estate.

A Vacation Cottage Headache: The Forced Sale

Let's say you leave your cottage to your three children. Two of them are happy to use the cottage and work at keeping it in good shape. But one of them lives far away and can't spend his vacations at the cottage. His wife and children have no particular attachment to the place. After a few years, he decides he just can't afford his share of the expenses (maintenance and taxes) and doesn't really want to own the cottage anymore. He'd rather have his share of its value in cash, to pay for your grandchildren's college tuition.

He asks his siblings to buy him out. They would like to but just don't have the money. They offer what they can, but it's far less than the actual value of his share. They hate the thought of selling the place and think their brother should just let things stay as they are. So what now?

If the unhappy sibling is determined to get his money out, he can force a sale of the property—in court, if necessary. That's true even though he owns only a one-third share; in this situation, the majority does not rule. A forced sale not only means the family property is gone, but also that family harmony is deeply damaged, perhaps beyond repair.

The Alternative: A Cottage LLC Plan

Depending on your situation, a good alternative to leaving your children a direct interest in cottage real estate is to create a limited liability company (LLC), a form of business entity similar to a corporation, to own the property.

By creating an LLC, you've created a way to avoid transferring interests in a shared piece of real estate and all the problems (such as forced sales) that co-owning real estate might entail. Instead, you can transfer the membership interests in the LLC to them.

As part of the process of creating the LLC, you'll draw up a document called an "operating agreement." The operating agreement lays out in detail your heirs' (as well as future owners') rights and obligations regarding the LLC—whose main asset is the cottage, and whose main purpose is management of the cottage.

Ideally, the operating agreement covers scheduling, contributions to expenses, permissible owners, renting, maintenance, and whether the property can be mortgaged. It prevents forced sales but allows members of the LLC to withdraw from the arrangement gracefully, without disputes or risking the property.

Creating a cottage LLC plan isn't a DIY project. You'll need an attorney's help to brainstorm potential issues (and solutions), form the entity, and draw up the operating agreement. Your cottage plan doesn't have to be perfect (and you can change it during your lifetime if you want to), and you and your attorney might not be able to foresee every possible dispute that might arise. But even a good-enough plan can prevent costly and bitter strife among your descendants. They will thank you for it.

Before You Plan, Ask!

Before leaving an interest in your cottage to a child, confirm that the child really wants it. This is not as obvious or simple as it sounds. You love the cottage—if you didn't, you either would have sold it or made arrangements to have it sold when you die.

Your emotional ties to the cottage can blind you to the child's feelings about it, though. You might have a hard time understanding why your child might not want an interest in the cottage, even if it requires the child to make financial sacrifices (as you might have) to acquire and keep it. It's especially important to ask your child about their preferences if they live far away, don't have children to inherit a share in the place, or have financial difficulties. In these situations, the best course of action might be to leave that child other assets instead of a share in property that be more of a burden than a gift.

More Information

For more information on helping your family cottage and vacation home survive, including guidance on how to use it as a vacation rental and tips on minimizing your taxes, see Saving the Family Cottage: A Guide to Succession Planning for your Cottage, Cabin, Camp, or Vacation Home (Nolo).