The family cabin conjures up images of boating on sunny lake followed by smores around the campfire; the carefree atmosphere tampered only by sunburn and bug bites. Adults recall fond memories of childhood shenanigans and children remember the fun of catching their first fish.
A vacation home has a shared history and sentimental value; it's likely you want it to remain in your family for generations. Handling the transfer of ownership for vacation homes proves difficult, especially once ownership passes down more than one generation. A home once owned by a grandparent faces potential ownership by all the grandchildren and shares become more diluted with each succession.
How can you preserve your cherished asset?
Below are three of the more common options for transferring property ownership.
Fee simple is the highest, strongest and most permanent form of ownership. With fee simple, the owner has total and absolute legal rights to the land and structures. While straightforward in terms of rights, this type of ownership ends upon death and a future owner must be named.
Disadvantages to this include the possibility for creditor and divorce claims against the property. Also, if one member wants out of the ownership, a sale could be forced or other owner would need to buy out that share. Maintenance and informal financial contribution agreements can pose problems if one family member is responsible for fronting the upkeep costs.
Living trusts allow you, the grantor, to transfer ownership of the property into ownership of the living trust. The trust would pass to your beneficiaries upon your death, eliminating the need for probate court, but during your lifetime you would have control over the property.
A revocable trust means you have the power to change your mind at any time; the ownership reverts back to yourself. Revocable trusts are still vulnerable to creditors and it's possible the property would need to be sold to pay the grantor's expenses, such as medical or care bills.
An irrevocable trust is permanent, and the grantor no longer has ownership. An independent Trustee manages the trust. An irrevocable trust is not subject to estate taxes and can reduce costs for your heirs.
Entity status changes the ownership to a general partnership, such as a limited liability company (LLC). The property becomes an entity. Owners are insulated from personal liability claims and the property is out of reach of creditors. An airtight operating agreement for an LLC can help with laying out ground rules for using the property and outline decision making processes.
An LLC is not likely to be approved for a loan, so paying for larger expenses, such as a new roof or furnace, can pose challenges. As with anything crudely constructed, an LLC is only as good as the effort put into creating it. Poor wording and vague blanket statements will undermine your intent.
Before making any decisions with long term impact consult with an attorney. You don't want your dream vacation home turning into your children's nightmare.