Now that spring is finally here, people start to make plans to spend time in their vacation home. Then they start to think, what happens to this home if I die? The first thing you need to do is check whose name is on the title. Is it just in your name, or is it you and your spouse or your siblings? When two spouses hold a title jointly, there are certain automatic survivorship rights.
If both spouses’ names are on the title, the property passes directly to the surviving spouse upon the death of the first spouse. This is called Tenants by the Entirety. It’s as if each spouse owns 100% of the property. When one spouse dies, the other still owns 100% of the property. Nothing has to be done. But, if one of the spouses intended the property to pass to one or more children, it may make more sense to hold it in one spouse’s name.
If the property was bought with co-investors (i.e., someone other than a spouse) it will be necessary to work out whether it’s being held as Joint Tenants with Rights of Survivorship (JTROS) – in which the remaining co-owners automatically inherit the decedent’s share, or as Tenants in Common (TiC), meaning the decedent names who inherits his or her share of the property. If nothing is written on the deed, the default is Tenants in Common.
So the real question is, who do you want to get the property after you? That will often determine how that transfer should be structured. Real estate left directly to multiple family members automatically results in a TiC ownership, unless otherwise specified. That can create issues. If one owner in such an arrangement wants to sell his or her part and the others don’t want to buy up that share, they can go to court to force a sale of the property. With a TiC ownership, one owner can also renovate the property, rent it out to a third party, or sell out his or her share, without needing any sort of permission or agreement from the other owners.
Obviously, it’s hard to look down the generations and figure out how co-owners are going to get along. One option is to create a limited liability company that owns the vacation home. An LLC can set up a framework for maintaining the property, scheduling use by various family members and setting limits on the transfer of pieces of ownership. You can even grant interest in the LLC that owns the vacation home to other people, while still retaining management decisions for the LLC.
There are other concerns that many of us don’t even think of. Many people own summer homes in a neighboring state, which can cause a lot of confusion when it comes to one’s estate, if the Will isn’t carefully crafted. If you own real estate in a different state at the time of death, the executors of that person’s Will may be required to go through a second probate proceeding in the state where the property lies, in addition to the probate proceeding in their home state.
You also may like the idea of giving away the summer home before your death. This is usually done for estate tax reasons. A vacation home that has been turned into an LLC can be gifted to children, in part or in whole. Another alternative is to create a qualified personal residence trust, or QPRT. This is an irrevocable trust to which you can transfer ownership of the vacation home, while still retaining the right to use it for a specified number of years. As long as you survive that term, you can pass the home to your children in equal shares. Unfortunately, if you die before the end of the QPRT’s term, the entire interest in the property goes back into your estate and is passed down according to the Will.
All in all, a vacation home is usually a great thing to have and to enjoy for many years. You just have to remember that it is another piece of the estate planning puzzle.