The Challenges of Planning the Client’s Legacy of Place and Togetherness

Written by Timothy Borchers

The vacation home . . . It evokes an image of family and friends enjoying time together at a cottage or cabin, lodge or ranch, somewhere away from it all—the lakeside or seaside, in the country, or on the slopes—in a scene that is repeated year after year. 

It could be a Hyannis Port compound like the Kennedys’ or equivalent to Shrek’s shack in the swamp, but more likely, it is something in between. Regardless of whether it is modest or upscale, when everyone from Grandpa down to the youngest grandkid says in a giddy moment, “This place is awesome! I hope we can enjoy it forever!”, it is not just a home, it is an heirloom property.

Worth Holding On To?

Vacation homes are found in every state and province and abroad. In the United States, they account for 5 to 10 percent of the housing stock. In areas of Cape Cod, the Keys, Flagstaff, Tahoe, and the Upper Peninsula, second homes make up 25 to 50 percent of the tax base. As housing goes, they are underutilized, expensive to maintain, and costly to own because of mortgage interest, insurance, and taxes. Their prices are volatile because of fluctuations in the economic cycle.

They may not be good investments, but clients still want them and often own them until they die. As an estate planner, it is my job to aid a family in the transition of such homes to the next generation and fulfill the parents’ hopes for their family and their legacy, if that is what they choose to do. 

Guiding the Owners: The Role of the Planner

As an estate planner with a passion for planning for the vacation home, my role is to identify the heirloom and help successfully transfer it to the next generation. A good plan will position the heirs to keep, share, buy out, or liquidate in a manner that preserves the values that were embodied in the property while the parents or grandparents were alive. 

But, while we can lead our clients to the vacation home plan, we cannot make them sign it. Conviction about the importance of such a plan among the current generation of owners is in short supply for two reasons. 

Naivete about ownership issues. The first reason current owners do not set up a succession plan for the home is that they are uninformed about the issues involved in family co-ownership. Moms and dads often say to me: “My kids are smart, so they’ll figure it out.” Perhaps Johnny is expected to take care of the house and Janey is supposed to plan the schedule and the budget—but nothing is actually planned, and Johnny and Janey have other ideas. 

The original owners are often unrealistic about their kids’ level of skill in organization, cooperation, and financial discipline. Parents assume that their kids’ ability to manage in life will translate into an ability to co-manage the family home, like parents who think their kids will have no trouble stepping into their shoes to run a family business (another proven fallacy). To exacerbate the problem, unlike a family business, there is no money coming in, and there may not be enough money to cover the costs of maintaining the vacation home. 

Lack of proper guidance. The second reason that passing down a vacation home can fail is that many clients do not hear the right message from their advisors. Unless a certified public accountant, financial planner, corporate lawyer, realtor, or even an estate planner has seen the results of poor planning firsthand, they may be passive or even dismiss the problem. They often share the ignorance of the parents and believe that receiving an heirloom home is just like inheriting money. Thoughtful advisors will realize that the vacation home is special and that they do not have the subject matter knowledge to advise on proper arrangements. 

A sensible plan is possible for every second home. Estate planners can set up an organization, can provide for its management, can plan how to finance it, and can protect it from outside claims. In short, you can guide the succession even when the clients and others just do not understand the need for it. 

Great heirloom property planning requires honesty about the level of interest and the strengths and weaknesses of the family members in managing a home. Proper planning must also be realistic and provide a means to support the plan, allowing the legacy to continue. 

The Plan: Sell or Provide an Agreement to Keep It and Organize the Exit

Sell. The first option is for the parents (current owners) to let it be known that the property shall be sold within a specific, short period (e.g., one to three years after the parents’ passing) unless (a) the immediate heirs are unanimous in their desire to keep it, or (b) a buyout or setoff is offered to allow individual heirs the option to retain the property and that sets forth the cost to them. Those who retain ownership of the home must then have a co-ownership agreement meeting the terms outlined below. Clients are often relieved to be presented with this choice.

Provide an agreement. On the other hand, if the parents have decided that the heirs should keep the home, then they should provide a prepared agreement spelling out how to run the property, how to pay for it, and how to eventually end the arrangement amicably. 

Increasingly, I try to dissuade parties from perpetual or even thirty- or fifty-year terms for these agreements. I often urge a manageable ten- or fifteen-year term with five- or ten-year renewal options. The renewal milestones allow soul-searching by the heirs about their level of commitment. One or more may call it quits at these junctures. Perhaps the heirs who wish to exit will receive no payment but instead simply be relieved of their obligations. Perhaps their interests can be bought out, at a discount, if that is affordable to the other owners. Another option is to allow the departing owner or owners to pull the plug on the whole show and require a sale at market value.

Funding. If the parents want the property to be retained, then they must provide some level of funding or the means and instructions to support the owners of the home in the future. 

Any meaningful amount of money will help grease the skids for the road ahead, but my favorite plan includes money to provide material support for the property for at least five, ten, or twenty years. Set aside money for this purpose from the estate at death, or begin investing or gifting into an entity that is set up to hold title to the home during the parents’ lifetime. The more expensive the home is to maintain, the fewer years it may be affordable to retain it.

An AUGUST Agreement™

There is insufficient space here to elaborate on all the possible points of the heirloom agreement, but the following are the essentials of a well-crafted arrangement, represented by the acronym “AUGUST.”

Allocation of ownership. Ownership and how it will be allocated are fundamental: What are the starting percentages or shares of individual or family-unit owners? How will they calculate changes to shares when capital calls are made and met—or not met? What is the method for valuing those shares? Are the shares to be per capita or per stirpes in successive generations? (Note that ownership may not exist at first because the interests are in trust, but one must plan for the eventual termination of the trust into property interests, subject to any applicable rule against perpetuities.)

Understanding of purpose. Are the owners retaining the home for family use only? For rental? To break even? To make money? Year-round or seasonal? As-is or renovated with modern conveniences?

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