For many families, a second home is a place where vacations are enjoyed, memories are cherished and values are passed down. Preserving this legacy for future generations, however, is rarely as simple as passing down the house through your will. It requires careful planning to mitigate arguments, reduce tax liabilities and ensure everyone in the family can continue to benefit from the home.
As you begin to think about transferring your home to the next generation, keep these planning strategies in mind.
When families plan ahead for how a second home will be passed down, they lay the groundwork for smoother transitions and fewer surprises. As part of this planning, it’s necessary the decisions weigh both financial factors and the family dynamics that are at play. The costs of owning the property, like maintenance and insurance, matter just as much as the expectations among siblings, children and other heirs. For example, the family member most eager to keep the home may also be the least financially prepared to handle the ongoing expenses that come with it.
Along with challenges like this, there are a few other factors that your family should consider before starting the transition process, like:
Oftentimes, these factors are best accounted for through open, family-wide discussions. Although these conversations can be uncomfortable at times, they’re worth having to understand both the emotions and practical realities surrounding the situation. As your family comes together to discuss, keep the following questions in mind:
Your family should also consider both day-to-day costs and how the home’s expenses will be funded over the long term. Creating a dedicated fund within the ownership structure – whether through cash, investments or even life insurance – can help ensure that taxes, repairs and maintenance are covered, even if only for a defined period during the property’s transition to the next generation. This prevents heirs from having to chase down one another for funds.
The more you can determine together before beginning the transition process, the better. This will help you build a plan that removes ambiguity and minimizes family disagreements in the future.
Once your family is confident and aligned on the goals for the home, it’s time to decide the proper entity to hold the property – a structure that governs day-to-day ownership and helps build a path for eventually passing the property onto future generations.
There are many strategies out there for your family to consider, but below are two of the most common ones. Each method comes with its own pros and cons, but the right approach will depend on your family’s unique circumstances.
Trusts are a great way to create a defined structure for holding your family’s property and for specifying how it can be used. While there are many different kinds of trusts, they are often used to transfer assets like real estate both during life and after death. Using a trust to hold the home during your lifetime allows you to continue using the property while establishing the structure and rules that will apply after your death.
When you put a house into a trust, you decide who inherits the property and when. On top of that, you also appoint a trustee – sometimes yourself – to manage and maintain the home according to the trust before it is officially passed on. After your death, the trust lives on as a document for your family to reference, laying out the decisions you made about the property earlier on.
Contributing a second home to a family LLC allows relatives to jointly own and manage the property. Through the LLC’s operating agreement, you can outline who makes decisions, how the property is used, what happens if a family member wants to exit and how ownership is divided into units.
This setup also creates a helpful framework for future management and smooth transitions. As original owners age, managing a second property can become more challenging. An LLC provides a way for heirs to step in and handle responsibilities in accordance with the operating agreement.
Another benefit of using an LLC is that it can help protect your family from liabilities related to the property, as long as it is appropriately administered. And if you plan to transfer ownership gradually during your lifetime, the LLC structure can make that process smoother. Just keep in mind that there may be tax implications, so be sure to discuss with your Financial Advisor.
Regardless of which structure you and your family use, it’s vital to add the necessary protections to safeguard your home from potential risks. Talk with your Financial Advisor and insurance agent about the most effective ways for you to do this, like additional liability coverage. This adds another layer of protection against accidents, creditors or lawsuits connected to the property.
By talking openly as a family, anticipating challenges and choosing the most effective ownership structure, you can remove uncertainty and minimize conflict as you pass down your second home. And while this article highlights two of the most common strategies – trusts and family LLCs – there are other approaches that could also fit your family’s circumstances. Partner with your Baird Financial Advisor, who has access to estate planning tools and experts, to decide the right structure for you and help your family’s legacy home remain a place of connection for years to come.
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.
