How to successfully pass down the family vacation home

When they were young, Molly’s parents purchased a vacation home on Lake Michigan. Molly, an only child, spent many happy summers there while growing up. She loved her summer friends and the time she spent there with her parents. It was the special place she brought her future husband to meet her parents. Later, she and her husband spent many happy vacations there with their young family which, within 10 years, included four children. 

Eventually, Molly inherited the house and, years later, retired there with her husband. Their four adult children, all living in the Chicago area, visited often, bringing boyfriends, girlfriends and, eventually, spouses and their own children. The family especially treasured their Fourth of July celebrations there together.

Molly and her husband loved this home and saw it as the family’s gathering place. As part of their estate planning, they were careful to leave the house to their four children equally and outright.

The vacation home was older, which was part of its charm. But like many old houses, it needed regular maintenance and some costly repairs from time to time.

From treasured retreat to source of strain

Over time, one of Molly’s four children moved to California and since he was unlikely to use the house often, he didn’t want to foot those bills. That sibling eventually asked the three others to buy him out of his share. Two of his siblings thought that was a great idea and had the money to buy him out. The third sibling couldn’t afford the buyout plan—and didn’t want to own a smaller share of the house than the other two.

The reluctant sibling was already nursing some hurt feelings. She lived nearby and used the house regularly but because she was single, she often ended up in the smallest, loudest bedroom near the kitchen, even though she was an equal partner in ownership.

In hindsight, while Molly and her husband understood the importance of estate planning, their approach to gifting the house could have been better. As in so many families, unforeseen circumstances made it difficult for the children to enjoy the house equally. Over time, disagreements led to some ill will among the children, and the house no longer served as a joyful family hub.

While no plan can account for every eventuality, some of the changes that affected Molly’s family are not uncommon. A well-thought-out plan can address many of these, increasing the chances that a vacation home remains a place of relaxation and family togetherness.

The importance of estate planning

If you want to leave real estate to your children and possibly your grandchildren, we’d recommend these steps:

• Begin with a candid conversation. This should include your children and, if you are comfortable doing so, any partners or spouses. Describe your vision for the future of the vacation home and gauge their enthusiasm and commitment to your plans.
• Consider selling the house. You may find it useful to do a full cost-benefit analysis of keeping the vacation home. You’ll want to consider hard costs such as maintenance, repairs and any renovations. Also weigh the emotional costs and benefits. Remember that the sale does not have to happen immediately. You can sell the house during your lifetime, of course, or have it sold at your death.
• You could put the house into a trust directing that it be sold at the end of a specific timeframe, or upon a majority decision made by your children or descendants. Keeping the home for the family in a trust requires drafting a trust agreement that names a trustee and, ideally, provides liquid assets to maintain the home. The trust agreement can be accompanied by a separate letter of wishes to provide guidance to the trustee. Additionally, and very importantly, you should consider requiring an operating agreement made among the trust beneficiaries that guides the use, maintenance and perhaps sale of the home. 

It is critically important that both the trust agreement and the operating agreement be drafted for flexibility. Usually, trusts are drafted for the benefit of “descendants” or “children and their descendants” without giving priority to any particular generation. This can cause disagreements as the family grows and each family member is allotted less time to use the house.

Crafting a trust agreement

The trustee is charged with caring for the house. You may want to choose an independent, professional (non-family) trustee, particularly if the trust is designed to last for multiple generations.

The trust agreement can also prevent the house from becoming a financial burden. If you’re able, leave enough money in the trust to pay for the property’s maintenance (this would include an estimate for taxes) and repairs. The trust agreement should also lay out the conditions, if any, that would allow the trustee – or your descendants to direct the trustee – to sell, or transfer the house.

It’s best not to burden the trustee with a detailed laundry list of instructions that they’re bound to follow. Instead, you can provide a non-binding letter of wishes. This can put forth general suggestions and inform trustees of your values and intentions. Importantly, you can update a letter of wishes during your life from time to time, if circumstances change among your children.

Planning in advance with an operating agreement

The second helpful document is an operating agreement that details how the house will be run. An operating agreement, agreed to by the beneficiaries, can lay out guidelines and expectations that help prevent disagreements. 

Here are some of the issues that might be covered in an operating agreement:

• Time at the property—The operating agreement can allocate time—including holiday weekends—among family members or branches.
• Other uses—This addresses the potential use of the property for charity events or family weddings, the ability of family members to host non-family in the house and any rental of the property.
• Maintenance responsibilities—Who opens the home for the season and who shuts it down? Who inspects the property and winterizes it? Will there be a paid 3rd party property manager? The trustee can become liable if the property is not adequately maintained but typically, family members don’t want the trustee  to coordinate repairs.
• Renovations—These can be a touchy topic and generational divides (“It’s fine” vs. “It’s way out of date”) are common. Of the three children who used Molly’s house regularly, one did not have the money to renovate. The other two could afford it, but they didn’t agree on what those renovations should look like.
• Substantial damage—Some wear and tear is normal and to be expected. But if the house sustains damage beyond that, who should pay for it? The trust or the responsible family member?

When preparing to leave a beloved vacation home to your children, it may be difficult consider all the potential sources of disagreement around such a thoughtful gift. But proper planning can help ensure that your vacation home remains a place of joy and togetherness and that your children, and perhaps future family members, can enjoy it to the fullest. 

We can help

Determining the future of a vacation home takes time and forethought. Your J.P. Morgan team can help you explore your options, consider the relevant dynamics and lay the groundwork for the best possible outcome.