Passing a Vacation Home to the Next Generation
For clients whose vacation homes have produced summer after summer of family memories, it’s natural to want to pass the place down to the kids. But the conscientious advisor will caution them that unless it’s handled right, gifting or bequeathing a summer house can open a Pandora’s box of financial and legal hassles. Because there’s so much emotion swirling around a place where close relatives have spent festive — and often formative — weeks, a vacation home isn’t just another asset on the family balance sheet.
Advisors’ challenges can include helping adult siblings negotiate, say, who sleeps in the bedroom with the ocean view. “We are rapacious, territorial animals,” says Rich Hogan, an advisor with Merrill Lynch’s Private Banking & Investment Group in San Francisco. Hogan, whose 11-person team manages more than $2 billion, says he has seen more than his share of conflict between siblings who jointly inherit vacation homes.
Amir Mossanen, an advisor with Wells Fargo Private Bank in Beverly Hills, Calif., says that while the parents who bought the property are still alive, problems tend to remain dormant. Mom and Dad make the rules, and the kids obey them. As Mossanen puts it, it’s when the dictatorship gives way to democracy that civil war sometimes breaks out. Parents can prevent that by communicating their vision for the home to children — is it an income-producing asset or a place where the family continues to get together? — and giving them the opportunity to buy in or opt out.
Either way, most families face built-in inequities. In some cases, one sibling lives near the vacation house and can use it often, while others live far away. One solution, says Mossanen, is to turn it into a rental property. For example, two siblings could rent the home to strangers for $1,000 a week and split the income, and rent it to each other for $500 a week. “That equalizes things,” Mossanen says.
The sibling who lives closest to the house is likely to be the one who goes running when the roof starts leaking — another potential source of conflict. That sibling should be paid, Mossanen says. In the case of a Los Angeles family he advises that includes three siblings, one of whom is responsible for maintaining the vacation home, the others pay their sibling a small management fee out of the house’s rental income.
Maintenance expenses and property taxes are another can of worms. Unless parents leave kids some funds to take care of the vacation home, “what was supposed to be a gift turns into a liability,” says Mossanen. “My suggestion to parents: Before you gift an asset that requires upkeep, make sure you also give them something that produces income,” like an investment portfolio.
Need for Clarity
Then there are the tax consequences of saddling children or grandchildren with a huge capital gain on a home that’s been in the family for decades. For very wealthy families, a multi-generational trust can be a good long-term strategy, says Stacy Allred, a wealth strategist for Merrill’s Private Banking & Investment. Another is a qualified personal residence trust, which removes the house from the parents’ estate while allowing them to continue living in it rent-free for a number of years.
Allred says the best financial plan for a second home is a clearly communicated statement of the original owners’ goals. “We’ve seen really high-functioning, close families squabble over the vacation home,” she says. “They treat it casually. But the reality is, it’s a shared family asset. You need to put some structure around it.”
That’s because powerful parent-child dynamics, often never openly acknowledged, have a way of wrinkling estate plans. One sibling may be perceived as a black sheep; another might be a target of bitter envy because others thought her the family favorite. “Parents have to be careful and make sure their intentions are clear, because after they’re gone, the kids are going to make assumptions,” says Patrick Collins of Towson, Md.-based Greenspring Wealth Management, a firm with $1.3 billion under management.
Some advisors find the gifting of a vacation house so fraught, they counsel clients not to do it. “I discourage people from leaving the house,” says Kevin Fitzwilson, managing partner of Coldstream Capital Management in Bellevue, Wash. “Usually kids prefer cash.”
And if clients insist on keeping the home in the family, their number-one priority should be making sure it’s funded. “Have a trust or endowment to deal with property taxes and maintenance,” says Fitzwilson, whose firm manages $1.3 billion. “Then you just fight over who gets the place on the holidays.”