Do you have a vacation home that you would love to keep in your family? Here are some ideas to ponder to make that happen! But first, you really do want to ask your children/grandchildren not only whether they are interested in continuing to own the vacation home, but are they interested in owning it together?

  1. Transfer the vacation home outright to your children after death. This allows your children to decide how and in what fashion they will continue to own the cabin. This option is simple to implement, but comes with some risks. For example, a child’s marriage/expectations of usage/divorce/creditor issues can impact the situation. There are ways for the children to plan and protect against these issues by entering into their own agreements, such as a limited liability company (LLC) or Tenancy-in-Common Agreement. If they receive the real estate from you at your death, their basis is the property is its fair market value on your date of death (referred to as a stepped-up basis).
  2. Earmark the cabin for a specific child who has an interest in owning the real estate. You can make your other children whole by distributing other assets to them at your death.
  3. Add a first right of refusal which gives a child the option to buy the vacation home at its fair market value before it is distributed outright to children or sold. The purchaser’s share of the estate/trust can be used towards the purchase price. If there are enough trust assets available to make the non-purchasers whole, the purchaser’s share can be distributed “in-kind” with the vacation home.
  4. Have the vacation home held in a trust for a specified number of years OR until the death of the survivor of your children (or other beneficiary). You can fund the trust with enough life insurance so that any child who wants to opt out can be paid off with the death proceeds or use the life insurance proceeds to simply cover future cabin expenses. This can be helpful if there is disparity in income between children. This option can become tricky when one child dies and the surviving children now own the vacation home with their nieces and nephews.
  5. Transfer the vacation home to an irrevocable trust during your lifetime. This requires you to give up ownership and may create negative tax results. When the children receive the real estate during your lifetime, they receive your basis in the property (carry-over basis) and this can impact them negatively if it’s a highly appreciated piece of real estate. The irrevocable transfer may also constitute a taxable gift. If you have a taxable estate and want to irrevocably transfer the property at a discounted rate, but retain the right to occupy it for a number of years, consider creating a Qualified Personal Residence Trust (QPRT).
  6. Create a family limited liability company (LLC) in which you gift LLC membership units to your children. This allows you to be in control of setting up the management structure. It can outline the various costs associated with maintaining the property are paid for; what happens upon an LLC member’s death/divorce/desire to sell etc. Another benefit is that the LLC provides personal liability protection.