Protecting Your Summer Home: Estate Planning for Vacation Properties

Owning a summer home can be a wonderful asset, offering a retreat for family vacations and a potential source of rental income. However, as with any valuable property, it’s crucial to ensure that your vacation property is protected through thoughtful estate planning. Here’s what you need to know about safeguarding your summer home for future generations.

Understanding the Importance of Estate Planning for Vacation Properties

Estate planning for vacation properties involves creating a comprehensive plan to manage, maintain, and transfer the property according to your wishes. Without proper planning, your vacation home could become a source of family disputes, financial burdens, or even be subject to a forced sale to cover estate taxes.

Key Considerations for Estate Planning

1. Title and Ownership Structure

• Sole Ownership: If you are the sole owner on the title, the property will go through probate upon your death, which can be a lengthy and costly process. If your second property is in a different state than the one in which you are domiciled, this probate process will go through the court system in the state in which the property is located. This can cause a substantial burden on your loved ones during an already difficult time, where they would not only have to probate your primary residence in your home state, but they would also have to work with an out-of-state attorney to probate your vacation home, adding even more expenses to the process.
• Joint Ownership with Right of Survivorship: This allows the property to pass directly to the surviving owner(s) without going through probate. If your vacation home is in Massachusetts, you should include both you and your spouse on the deed as tenants by the entirety to ensure the property would transfer to the surviving spouse immediately upon their death. Not all states use tenancy by the entirety for married couples, but all states have a form of joint tenancy with a right of survivorship.
• Revocable Living Trust: Placing the property in a trust can help avoid probate, provide clear instructions for management, and offer flexibility during your lifetime. This also makes the distribution of the property easier and much faster – regardless of whether you want the property to remain in the family for years to come, or if it is your desire for the property to be sold. Whichever you decide, placing your vacation home in a trust grants the Trustee far more flexibility, as they can then take over management, or begin the facilitation of the sale immediately after your death, rather than being forced to wait for the estate to be settled in the probate court. The final benefit is that this type of trust is fully revocable up until your death, so if you have a change of heart as to how or who you would like to own the property or receive the proceeds of a sale at any time during your lifetime, you can amend or revoke the trust accordingly.

2. Family Agreements

• Create a family agreement outlining how the property will be used, maintained, and managed. This can prevent conflicts and ensure that all family members understand their roles and responsibilities.
• This can come in the form of a schedule of beneficiaries or ownership breakdown where you can outline what percentage of the rental income each family member is intended to receive. Or similarly for a family vacation home, this contract can outline how much time a given family member is allotted to use the house every year.

3. Financial Planning

• Plan for ongoing expenses such as maintenance, property taxes, and insurance. Consider setting aside funds or establishing a dedicated account within a trust to cover these costs.

4. Tax Considerations

• Be aware of potential estate taxes and capital gains taxes that could affect the transfer of your vacation property. Proper planning can help minimize these taxes and preserve the property for your heirs.
• We also advise working with a qualified tax professional, especially if your vacation home is being rented and generating your or your family income.

Tools for Protecting Your Vacation Home

1. Trusts

• Revocable Living Trust: Allows you to maintain control of the property during your lifetime and provides for a smooth transfer upon your death.
• Irrevocable Trust: Offers greater tax benefits and asset protection but involves giving up control over the property. Read our full breakdown of Revocable and Irrevocable Trusts, and the Pros and Cons of each in our legal blog post here.

2. Limited Liability Company (LLC)

• Transferring the property into an LLC can provide liability protection, streamline management, and facilitate the transfer of ownership interests.
• For more information outlining the benefits of holding real estate in an LLC, read our legal blog post here.

3. Life Estate

• A life estate allows you to retain the right to use the property during your lifetime while designating a remainder beneficiary to inherit the property upon your death. 

4. 1031 Exchange for Investment Properties

• A 1031 exchange can be used in your estate plan to grant your heirs a stepped-up tax basis for your second home, saving your children or heirs thousands in the process. Read more about the benefits of a 1031 exchange for investment properties here.
• Please be advised that this tool takes meticulous consideration and preparation. A 1031 exchange requires that your vacation home generate income for a specified amount of time throughout the year since this option is only available for investment properties. Before considering this option, you must first consult with a certified tax expert or a qualified intermediary.

5. Incorporating a Right of First Refusal or Right of First Offer in your Estate Plan

• If you are unattached to your vacation home and intend for your estate to sell it upon your death and distribute the proceeds of the sale, you can incorporate either a right of first refusal (ROFR) or a right of first offer (ROFO) in your estate plan to grant a family member or friend the ability to purchase the property. This may be a good option when you know that a specific family member has strong emotional ties to the property or has already communicated to you that they would love the opportunity to buy it from you down the road.
• A ROFR is an option contract that gives the holder the opportunity to match any offer the seller receives before it can be accepted. If the holder matches the offer, the seller must sell the property to the holder of the ROFR option over the other potential buyer. This type of option is more advantageous to the holder, because they don’t have to make the first offer, but instead can either exercise their option to match any alternative offer, or refuse to match any other offer before the property can ultimately be sold.
• This differs from a ROFO option where the holder has the right to make the first offer on the property before the seller has the ability to negotiate with other potential buyers.
• A seller must first approach the holder of the ROFO option to give them the first opportunity to make an offer. The holder can decline, however, to make any offer at all. If they decline, the seller can then openly list and market the property to the public. Similarly, if the seller believes the offer is not competitive, they can reject it and move on to other potential buyers.
• This type of option favors the sellers, because it essentially guarantees the first offer, which in turn can set a baseline price for future negotiations
• When it comes to family vacation homes, often times parents will build a discount into a ROFR offer. For example they can build a contract that allows the children the right of first refusal to purchase the home at a 10% discount from the first offer received.

Steps to Implement Your Estate Plan

1. Consult with an Estate Planning Attorney

• An experienced estate planning attorney, such those at Lane, Lane & Kelly, can help you navigate the complexities of estate planning for vacation properties and ensure that all legal requirements are met. Whether you are aiming to protect a primary residence, secondary home, or an investment/rental property, our experienced attorneys are readily available to ensure your assets and your loved ones are protected.
• We have years of experience helping residents all across the South Shore of Massachusetts manage their second homes across all New England States.

2. Draft and Execute Legal Documents

• Create the necessary legal documents, such as Wills, trusts, and family agreements, to formalize your estate plan.
• At Lane, Lane & Kelly, we do all of this for you with a highly personalized approach. We will remain in constant communication with you from the time you come in for a free consultation, all the way until you formally sign and execute all of your estate planning documents.

3. Communicate with Family Members

• Discuss your plans with your family to ensure that everyone understands your wishes.
• Contrary to what the movies want you to believe, how a piece of property is used or what someone’s inheritance looks like is rarely a surprise. Make sure that your specific wishes are relayed to your loved ones so nobody is left in the dark, making the passing of any assets as smooth and easy as possible.

4. Review and Update Regularly

• Regularly review and update your estate plan to reflect changes in your family situation, financial status, and state and federal tax laws.
• At Lane, Lane & Kelly, we create client relationships that last for life, and will proactively reach out if we believe a change to your plan is in your best interest. 
• We also recommend that all living estate plan documents (such as a power of attorney, health care proxy, etc.) are updated every 3-5 years to ensure they are up to date and will be honored by local banks and businesses. 

Conclusion

Protecting your summer home through estate planning is essential to ensure that it remains a cherished family retreat for future generations. By considering ownership structures, beneficiary designations, family agreements, and tax implications, you can create a comprehensive plan that safeguards your vacation property. At Lane, Lane & Kelly, we specialize in helping families navigate the complexities of estate planning. Contact us today to schedule a free consultation to review your plan and safeguard your summer home.