Keeping Your Vacation Home in the Family
Succession planning strategies for a smooth transition
Whether it’s your country cabin or summer beach house, your vacation home is likely more than a piece of real estate – it’s where traditions are made and memories live on. Passing that legacy to the next generation can be a meaningful gift, yet doing so thoughtfully often requires more than leaving the home to your family in a will.
With the right succession strategies in place, you can pass your vacation home down in a way that supports family harmony and coordinates with your broader estate plan. Here are key strategies to structure the transition – and the discussions to have along the way.
Having the Right Conversations Early
As you ponder the future of your family’s vacation home, getting everyone on the same page is vital. Parents or grandparents may have a clear vision for how the home should be passed down, but younger family members may not share the same ideas or capacity to take on responsibility. That’s why succession planning should account for both the financial realities of ownership and the family dynamics.
Consider starting with open, family-wide discussions. Discuss factors like how time at the home will be divided, who will handle maintenance, how that maintenance should be paid for, whether the property should ever be sold and even how future generations should inherit it. This may also include understanding the home’s ongoing costs – like taxes, insurance and upkeep – and deciding whether to set aside funds so the next generation has time to enjoy the property before taking on those expenses. These answers will help determine the right structure for managing day-to-day ownership and eventually passing the property onto the next generation.
Putting the Right Framework in Place
There are many strategies for your family to consider when passing your vacation home down, but below are two of the most common. Each method can play a role, but your unique planning goals determine which structure – or combination – will work best.
Method One: Trusts
Trusts offer a long-term, defined structure for holding your family’s home and specifying how it can be used and transferred. They can be used to transfer assets both during life and after death – and placing the home in a trust during your lifetime allows you to continue enjoying it while setting the rules for the future. There are three key advantages of using a trust to pass on your home:
1. Built-in guidance for future decisions. A trust lets you decide who inherits the home and when, while also addressing a wide range of “what-if” scenarios. For example, what if a beneficiary decides to sell their interest? How should that interest be valued? What if scheduling conflicts arise? This direction allows you to anticipate future family dynamics, rather than react to them.
2. A single point of reference. Rather than revisiting decisions each time ownership passes to the next generation, trusts provide one consistent plan that can guide the property indefinitely – helping keep your legacy in place.
3. An appointed trustee. A trustee is the person or organization you appoint to manage and maintain the home according to the trust before it’s officially passed on. You can choose for this to be yourself or a trusted family member. In some cases, families choose to involve a corporate trustee – like Baird Trust – as a co-trustee or directed trustee. That way, the corporate trustee can handle day-to-day responsibilities like paying expenses, coordinating maintenance and enforcing the terms of the trust while a family member retains decision-making authority for weightier decisions like whether to buy or sell a property or undergo large cosmetic renovations.
Method Two: Family Limited Liability Companies (LLCs)
An LLC offers a more hands-on, business-like approach to jointly owning and managing a vacation home. It creates a formal structure that establishes clear rules for management, ownership and future transitions. Three notable benefits of LLCs include:
1. A clear management structure. An LLC allows your family to choose a manager to oversee day-to-day decisions, with the ability to easily change that person over time. This makes it simpler for responsibilities to shift as the original owners step back.
2. Defined ownership interests. Ownership in an LLC is divided into percentages, making it easy to clearly define each family member’s financial interest (much like shares). This can help separate ownership from usage.
3. Smooth lifetime transfers. Over time, the original owners can gift their ownership interests while remaining involved in management. This can become especially helpful as responsibilities begin to shift.
While trusts and LLCs differ in framework, they share a core consideration: risk management. When structured properly, they can help protect your home from personal financial issues like lawsuits or divorces – and some families layer both for added protection. That additional security, though, can bring more legal complexity, costs and tax implications. No structure eliminates risk completely, so work with your Baird Financial Advisor as well as your insurance agent to add necessary protections like additional liability coverage.
Thoughtful planning, open conversations and the right ownership structure can help your family confidently pass your vacation home to the next generation. Your Baird Financial Advisor team can connect you with estate planning tools and specialists to help decide the right structure for you.
Tim Steffen, CPA-PFS, CFP®, CPWA®
Director of Advanced Planning
Baird Private Wealth Management
A Final (Tax) Thought from Tim
Just as trusts and LLCs vary in structure and purpose, they also vary in how they’re taxed. Depending on your approach, taxes can come into play when the home is transferred during your lifetime, when it is later sold, or when it is inherited by the next generation – and this timing can often affect how much of the home’s value is ultimately subject to tax. That’s why transfer decisions should be viewed as part of your broader tax planning strategy. Your Baird Financial Advisor can help you assess the potential impact and coordinate timing to align with your long-term plans.
This information has been developed by a member of Baird Wealth Solutions Group, a team of wealth management specialists who provide support to Baird Financial Advisor teams. The information offered is provided to you for informational purposes only. Robert W. Baird & Co. Incorporated is not a legal or tax services provider and you are strongly encouraged to seek the advice of the appropriate professional advisors before taking any action. The information reflected on this page are Baird expert opinions today and are subject to change. The information provided here has not taken into consideration the investment goals or needs of any specific investor and investors should not make any investment decisions based solely on this information. Past performance is not a guarantee of future results. All investments have some level of risk, and investors have different time horizons, goals and risk tolerances, so speak to your Baird Financial Advisor before taking action.
