The Family Vacation Home: Planning for the Future

A vacation home is more than just a financial asset — it is often a cherished place where the family gathers to honor traditions and create new memories.

Proper planning can ensure that the family vacation home continues to be enjoyed for generations to come. Here are five key steps you can take to prepare yourself, your estate and your family for the future.

1. Align on a shared vision for the future.

Before making a plan for the vacation home, it’s important to ensure that your expectations are aligned with your family’s evolving needs. Gather the entire family for an open conversation about whether their plans align with your wishes.

In some cases, the original owners may want to keep the home in the family, but their adult children may not. Or some of the siblings may wish to continue using the home, while others may have different preferences that they have kept private for fear of disappointing their parents.

Here are some guidelines for the family meeting:

• Make family members aware of your vision for the future.
• Discuss the heirs’ interest in using the property.
• Identify any differences in expectations among siblings.
• Discuss whether it is financially practical for the family to continue to use the property.

A discussion with family members can help clarify everyone’s intentions and strengthen the foundation for ongoing family harmony. Starting from a place of consensus greatly increases the likelihood of developing a plan that will meet the family’s goals.

2. Be strategic about when and how you transfer the home.

Many couples plan to leave the family vacation home to their children in their will after the second spouse passes. Some may gift the property to the next generation during their lifetimes. Both of these approaches can create unanticipated problems beyond the potential gift or estate tax issues.

If multiple adult children receive joint ownership of the property as a bequest or gift, they are considered “tenants in common.” This may lead to family conflict rather than family harmony. In a tenancy in common, all co-tenants have the right to occupy and use all of the property. Each child will be able to freely sell or dispose of their interest in the home without consent from any other co-tenants. Each co-tenant’s interest may be subject to creditors’ claims, divorce or even court-ordered partition by a disgruntled co-tenant who wants to cash out. This could result in a compulsory sale of the property even if the remaining co-tenants do not want to sell.

What’s more, a direct transfer typically lacks a written agreement to govern decisions or behavior. And it affords no structure or dedicated funding for the management and upkeep of the property.

Cost basis is also a consideration. If the home is transferred through a lifetime gift, the giver’s cost basis generally carries over to the recipient. With a bequest at death, the cost basis is generally adjusted to its value at death. If the home has appreciated or is expected to appreciate, this can be an important factor to consider with your tax and legal advisors.

3. Protect the property with a smart ownership structure.

Transferring the vacation home to the next generation via a trust, limited liability company or other ownership structure can help ensure your vision for the property is fulfilled and minimize potential conflicts while protecting the value of the home.

Qualified Personal Residence Trust (QPRT)
With this approach, the current owner — or grantor — transfers the property to a trust for the benefit of the family but retains an interest in the property for a term of years. The value of the interest transferred to the family is the full fair market value of the property minus the value of the interest retained by the grantor. The value to the beneficiaries is determined in relation to the interest rate used to value certain split interests at the time of transfer. Therefore, any future appreciation to the property will not be considered for transfer tax purposes. However, if the grantor does not survive the trust term, the entire value of the property will be included in their estate. As interest rates have marched higher, so has the effectiveness of QPRTs: As the value assigned to the donor’s retained interest increases, the value of the remainder gift decreases, resulting in tax savings.

At the end of the term, the QPRT may transfer the property outright to the children or hold the property in trust for their benefit. Note that, once the property is transferred at the end of the term, the grantor cannot continue to freely use the property. Continuing to use the property as if the grantor still owned it might result in the full value of the property being included in the grantor’s estate for estate tax purposes. Therefore, the grantor should consider a leasing arrangement, such as renting the property at fair market value.

Limited Liability Company (LLC)
The current owner can transfer the property into a limited liability company (LLC). Interests in the LLC may then be transferred to the next generation, or to a trust for their benefit, either immediately or over a period of time. The transfer may be made at a discounted value for gift tax purposes due to the closely held, non-marketable nature of the interests. When gifting interests in the LLC, owners may consider taking advantage of the annual gift tax exclusion amount ($18,000 in 2024) to minimize the tax consequences.

LLCs are particularly useful for dividing a vacation home among family members when the parents wish to retain control despite the associated gift and estate tax issues. The formalities of the LLC must be respected in order for the family to receive the transfer tax benefits as well as the benefits of limited liability for members, and for the LLC to be treated as a pass-through entity for income tax purposes, meaning the tax would be paid by the owners and not the LLC. Note that LLC planning requires a knowledgeable attorney familiar with business entities and estate planning in the state where it will be created.

4. Align on an agreement for the use and upkeep of the home.

To ensure the successful transfer of the family vacation home to the next generation, it is critical to clearly define roles and expectations in advance. The family should come to an agreement about how the home will be used, as well as how and by whom it will be maintained.

For example, if there are three children and six grandchildren, but only four bedrooms in the home, there will need to be a simple and workable system for sharing the space. Time might be divided based on ownership, a rotation, or on a first-come first-served basis.

The system should also address who may use the home, including in-laws, surviving spouses, pets, cousins, renters and guests. To minimize conflict, the sharing system should be fair and simple, clearly stated, in proportion to ownership, and reflect the family traditions and culture.

A well-planned vacation home transfer will include planning for expenses, upkeep and maintenance. Maintaining a property can be time-consuming and costly. Everyone should agree on a plan that reflects whether some family members use the place more than others, or some have greater financial independence than others.

Family dynamics will be a key consideration in managing the home. If there are some highly involved family members and others who want minimal involvement, it may work out best to have the involved family members be the property managers. If everyone in the family has an equal commitment to and involvement with the home, it may be best to manage the home as a group.

For property held in trust, this can be addressed in the trust agreement, with the trustee being responsible for management. For property held in an LLC, the operating agreement can address the question of management.

Regardless of who acts as manager, all the family members can still have an equal vote on bigger decisions like whether to mortgage the property, permit rentals or sell the home.

5. Build in safeguards for changing circumstances.

Even the most thoughtful plan for transferring the vacation home could hit a roadblock in the future. Over time, at least one of the adult children may decide they want to sell their interest in the home, be unable to afford their share of expenses, or experience divorce or widowhood.

Any agreement about the home should include a provision to address potential changes in a co-owner’s financial situation or family structure. If someone wishes to sell their interest in the property, the family should have the opportunity to buy the interest before anyone outside the family has the option.

As the grandchildren become adults with families of their own, new questions will arise about transferring the property to the third generation. At that point, the interests in the home could become further diluted, making decision-making even more challenging. Another question arises if the property will be transferred to only some members of the next generation: Will there be compensating gifts or bequests to the others?

If the plan fails to account for changes in the economic realities of the future owners, the intentions of the current owners may be thwarted. To promote harmony and prevent a potential forced sale, contingency plans should be built into the trust or operating agreement.

Preserve the emotional and economic value of the family vacation home

Planning for a successful transfer of the family vacation home should start with an open conversation about everyone’s wishes. Work with your tax and estate advisors to consider the optimal timing and ownership structure for the property. The right approach will provide a smooth transition of ownership and clear-cut guidelines for the use and management of the home.