Second Generation Vacation Homes
Category: Financial Planning
The vacation home where you spent your summer months growing up holds many wonderful childhood memories. Are those memories being blurred by arguments with your siblings now that all of you share the ownership and the accompanying financial responsibilities?
Your parents purchased a second home to use on special weekends and during the summer months. Perhaps it is in the mountains or on a lake. It has become part of the family tradition and your parents plan to pass the property to you and your siblings so that the grandchildren can share in the experiences as well. As your parents begin to age, more of the physical maintenance chores as well as the financial responsibilities begin to fall to you and your siblings.
Does this scenario sound familiar? If it does, you are not alone. Mountain lodges, lake cottages, and beach condos are being passed along to the second generation and all need to address similar issues.
Use and Expenses
The two issues that arise with the second generation owners are use of the property and expenses. With multiple owners, unless the property can accommodate everyone at one time, there needs to be an agreement regarding who gets to use the property on holidays and how the school vacation months are divided.
The second issue involves the cost to maintain the vacation home. Ideally expenses are divided equally among the owners. However, the financial wherewithal of the owners may be quite different. Some may feel a financial pinch when putting children through college, saving for retirement, and funding vacation home expenses.
Emotional Strain
Making group decisions can stain a relationship. Instead of having all the decisions made by Mom and Dad, you and your spouse along with each of your siblings and his/her spouse must agree on who gets to use the property as well as what money needs to be spent to maintain it. Instead of the vacation home providing a place for the family to continue to gather and stay connected, as hoped by Mom and Dad, it becomes the source of disagreements and tension.
What to Do?
Good communication and an understanding of financial obligations can reduce the potential problems between second generation owners. Having regular discussions regarding who wants to use the property is important. Many times, geography distance will not allow one owner to have the same access to the property as another. Or in some situations, one owner may prefer to have a vacation spot in a location offering different amenities and, consequently, rarely uses the inherited property.
Making a fair agreement regarding payment of expenses based on who uses the property versus an equal split will be helpful in avoiding money arguments. However, expenses that add to the value of the home such as roof replacement, adding a room, or extensive landscaping are acceptable expenses to be shared by all owners on a more equal basis.
Planning Considerations
The first generation owners should carefully consider how to include the vacation property in their estate plan. Having the property owned equally by each of the children may or may not be appropriate. However, if it has become obvious that one child is more interested in owning the property, then perhaps it would be more appropriate for that child to inherit the vacation home and the other children to receive other assets of equal value. If the estate does not have sufficient assets to do this, the estate plan can allow the property to be owned equally by the children with the caveat that the one child should have the opportunity to purchase the property from the other siblings for fair value.
The estate plan should always address the disposition of the property in the event of the death of the current owners. However, if may be prudent for the first generation owners to dispose of the property during their lifetimes if possible. This may include selling to children who are interested in maintaining the property. The disadvantage of selling is the realization of any capital gain and payment of the tax. If the property is inherited, capital gain is not realized and the cost basis for the new owners is the date of death value.
In situations where unrelated friends have purchased a property together, a buy-sell agreement should be created. This will document the agreed upon terms of the sale of the deceased owner’s portion of the property to the surviving owner. In the absence of such an agreement, the surviving owner may find it necessary to work out details with the children of the deceased owner.
Summary
The best advice is for the first generation owners to have a plan regarding disposition of the property. If you are such an owner, take the time to discuss your situation and your desires with your estate planning attorney or financial planner. With forethought and careful documentation, you may be able to accomplish your desires as well as maintain a close family relationship.
Elaine E. Bedel, CFP„ยต, is president of Bedel Financial Consulting, Inc., a fee-only wealth management firm providing financial planning and investment management services. For more information, visit their website at www.BedelFinancial.com or email to ebedel@bedelfinancial.com.
Does this scenario sound familiar? If it does, you are not alone. Mountain lodges, lake cottages, and beach condos are being passed along to the second generation and all need to address similar issues.
Use and Expenses
The two issues that arise with the second generation owners are use of the property and expenses. With multiple owners, unless the property can accommodate everyone at one time, there needs to be an agreement regarding who gets to use the property on holidays and how the school vacation months are divided.
The second issue involves the cost to maintain the vacation home. Ideally expenses are divided equally among the owners. However, the financial wherewithal of the owners may be quite different. Some may feel a financial pinch when putting children through college, saving for retirement, and funding vacation home expenses.
Emotional Strain
Making group decisions can stain a relationship. Instead of having all the decisions made by Mom and Dad, you and your spouse along with each of your siblings and his/her spouse must agree on who gets to use the property as well as what money needs to be spent to maintain it. Instead of the vacation home providing a place for the family to continue to gather and stay connected, as hoped by Mom and Dad, it becomes the source of disagreements and tension.
What to Do?
Good communication and an understanding of financial obligations can reduce the potential problems between second generation owners. Having regular discussions regarding who wants to use the property is important. Many times, geography distance will not allow one owner to have the same access to the property as another. Or in some situations, one owner may prefer to have a vacation spot in a location offering different amenities and, consequently, rarely uses the inherited property.
Making a fair agreement regarding payment of expenses based on who uses the property versus an equal split will be helpful in avoiding money arguments. However, expenses that add to the value of the home such as roof replacement, adding a room, or extensive landscaping are acceptable expenses to be shared by all owners on a more equal basis.
Planning Considerations
The first generation owners should carefully consider how to include the vacation property in their estate plan. Having the property owned equally by each of the children may or may not be appropriate. However, if it has become obvious that one child is more interested in owning the property, then perhaps it would be more appropriate for that child to inherit the vacation home and the other children to receive other assets of equal value. If the estate does not have sufficient assets to do this, the estate plan can allow the property to be owned equally by the children with the caveat that the one child should have the opportunity to purchase the property from the other siblings for fair value.
The estate plan should always address the disposition of the property in the event of the death of the current owners. However, if may be prudent for the first generation owners to dispose of the property during their lifetimes if possible. This may include selling to children who are interested in maintaining the property. The disadvantage of selling is the realization of any capital gain and payment of the tax. If the property is inherited, capital gain is not realized and the cost basis for the new owners is the date of death value.
In situations where unrelated friends have purchased a property together, a buy-sell agreement should be created. This will document the agreed upon terms of the sale of the deceased owner’s portion of the property to the surviving owner. In the absence of such an agreement, the surviving owner may find it necessary to work out details with the children of the deceased owner.
Summary
The best advice is for the first generation owners to have a plan regarding disposition of the property. If you are such an owner, take the time to discuss your situation and your desires with your estate planning attorney or financial planner. With forethought and careful documentation, you may be able to accomplish your desires as well as maintain a close family relationship.
Elaine E. Bedel, CFP„ยต, is president of Bedel Financial Consulting, Inc., a fee-only wealth management firm providing financial planning and investment management services. For more information, visit their website at www.BedelFinancial.com or email to ebedel@bedelfinancial.com.
For more information on Chautauqua Lake Real Estate & Living visit: www.chautauqualakehomes.com
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