Ask These Top Five Critical Questions Before Investing In Vacation Property

Did you just return from vacation? Are you now dreaming about owning a vacation property? Or, did you look at vacation homes while on vacation? Take a minute before you invest in a vacation property. You need to ask these five critical question before investing in vacation property.

Vacation Property Trends

Vacation homes continue increasing in popularity. In 2018, the National Association of Home Builders reported that there were approximately 7.5 million homes. This number makes up 5.5 percent of the total number of homes! Investors need to plan for, manage and maintain these vacation homes. And, these vacation homes are the birthplace of happy memories for you and your loved ones.

To make sure your place of happy memories is protected, you need to ask some important estate planning questions. So, without further adieu, here are the top five questions you must ask before investing in that vacation home.

What Will Happen To The Property When You Die?

The fate of your vacation property at your death largely depends on how it is currently owned. If you are the property’s sole owner, you alone need to decide what happens to the property when you die.  Do you give it to someone?  Does your Executor sell the property?

If you own the property as a tenant in common with one or more other persons, then you own a fractional interest in the home. So, you only can decide what happens to your fractional interest.

But, what if you own the property with another person as joint tenants with rights of survivorship?  If you die first, your interest will automatically transfer to the remaining owner without court involvement.  Same if you own property with a spouse as tenants by the entirety.  Your surviving spouse would automatically be the sole owner of the property.

Some people may set up a a trust or limited liability company to own the vacation property.  In that case, the entity will continue to own the property after your death.  The trust instrument or operating agreement may lay out additional instructions about what will happen at your death.

What Do You Want To Happen To the Property At Your Death?

When you take create an estate plan, you control what happens to your property when you die. You have the power to choose the fate of your finances and assets in a legally binding manner.

Most importantly, if you do not create a plan for your property, your state will decide for you according to its laws and by putting your loved ones through the probate process. The only exception to this is if the property is owned joint tenancy with right of survivorship or tenancy by the entirety.

Probate

Probate is the court-supervised process that winds up your affairs and distributes your money and property to the appropriate people. It is also important to note that owning property in a different state from where you reside could lead to your loved ones having to open two probates (one in the state where you resided at death and one where the vacation property is located).

Options for Handling Your Vacation Property

There are several different options for handling your vacation property.

Giving Property To Loved Ones

• Give the property outright to a loved one. This person may be your oldest child, someone who has expressed interest in continuing to use the property, or an individual with the financial means to maintain the property.

• Leave the property outright to a group of people. Because your whole family enjoys gathering together now, you may wish for them to continue gathering at the vacation property after you pass away.

  Create an Ownership Agreement

• Give the property to a group of people as tenants in common and create an ownership agreement. Because there are multiple parties involved, each with their own property interest and personal financial situations, an ownership agreement can lay out each one’s rights and responsibilities.

  Transfer to a Revocable Trust

• Prior to your death, transfer the property to your revocable living trust to be held for a long period of time or indefinitely. Because the trust is the property’s owner when you die, the beneficiaries will merely look to the trust to see what happens.

  There is no need for probate, and you can specify any rules you may have for the property and how it is to be held or distributed to one or more chosen beneficiaries. Note: State law may limit how long the trust can remain in effect (the rule against perpetuities).

  If you want the trust to hold the property indefinitely, speak with an experienced estate planning attorney about how to accomplish this goal.

  Create a Special Trust

• Prior to your death, transfer the property to a special trust that owns only the property to be held for a long period of time or indefinitely. This option may be advisable if you want to separate one property from the rest of your money and property to be managed on its own or if you have asset protection concerns.

  This trust agreement would also lay out each beneficiary’s specific rights and responsibilities with respect to their use and enjoyment of the property.

  Transfer to a Limited Liability Company

• Prior to your death, transfer the property to a limited liability company to be held for a long period of time or indefinitely. Depending on your objectives for the property, transferring it to a limited liability company may provide the beneficiaries with some additional asset and liability protection. The company operating agreement may also specify each company owner’s rights and responsibilities with respect to any company property. 

  Sale Instructions

• Instruct your trusted decision maker who will wind up your affairs to sell the property. If you believe that the money from the property’s sale would be of greater use to your beneficiaries or that none of them would want to buy the property, selling it can be an effective way to provide some money to benefit your loved ones differently.

Can Your Intended Beneficiary Afford The Vacation Property?

Yes, there may be a lot of happy memories associated with your vacation property. However, you know that there are also a lot of responsibilities. When you decide to leave your property outright to a person or group of people, they will become responsible for financial obligations such as mortgage payments (if any), utility bills, and property insurance and taxes.

So, you may want to leave a person your investment property. But, you need to consider if they can financially afford to maintain the property. Otherwise, your beneficiary may end up prematurely selling the vacation property.

Do All Of Your Intended Beneficiaries Get Along?

All your children may get along now. But, will they still be able to come together and see eye to eye when you are no longer living?

Or, maybe your children do not get along now. Becoming joint property owners certainly won’t help that situation. It may even make it worse.

When you own property with another, you need to be able to communicate, agree, and equally contribute to the property’s maintenance. A proper estate plan can address these potential issues.

Potential Issues To Consider

• everyone’s responsibilities with respect to the property,

• everyone’s rights to the property,

• who makes the decisions,

• what to do if a dispute arises, and

• how someone can walk away from the property.

How Do You Make Your Wish A Reality?

To make your dream a realty you should meet with a team who can help you create your plan. There are four key team members you should reach out to:

• estate planning attorney;

• financial advisor;

• insurance agent; and

• acountant.

Estate Planning Attorney

First, you need to legally document your wishes to ensure that your loved ones know what your wishes are, that they will be followed, and that all possible scenarios have been planned for.  So, you need to meet with an estate planning attorney to help you put those desires into a legally binding writing.

Financial Advisor

Second, if you have concerns about your beneficiaries being able to financially maintain the property, you need to meet with a financial advisor to design a plan that allows you to set aside money for its maintenance.

Insurance Agent

Also, you need to meet with an insurance agent.  Your agent will make sure the property is properly insured based on its intended use. Your agent may advise you to acquire additional life insurance in case you need another source of financial liquidity for its maintenance.

Accountant

Finally, you should meet with your tax adviser. You need to know of any potential tax consequences of transferring the vacation property, whether during your lifetime or at your death.

Contact Us

If you are interested in learning more about your options for protecting your vacation property and having your wishes for it carried out, please contact us.