If you own or are considering the purchase of a vacation property or second home, it is important that you protect the property with a proper estate plan. Consider the following important questions:
What will happen to the property at your death? The fate of your property will depend on how it is currently owned. If you are the sole owner of the property, or if you own the property as a tenant in common with one or more other people, you will need to decide what will happen to your interest in the property. If you own the property jointly with another person, the other owner may become the sole owner upon your death. If your property is owned by a trust or a limited liability company, the property will continue to be owned by these entities after your death.
What do you want to happen to the property at your death? By proactively creating an estate plan you get to choose what happens to your property and make your wishes legally binding. If you do not create a plan for your property, your loved ones will likely have to go through the probate court process. It is important to note that owning property in a different state than where you reside could lead to your loved ones having to open two probates. When planning, there are a variety of different options.
- Leave the property outright to one person or a group of people.
- Prior to your death:
- transfer the property to your revocable living trust, to be held for a long period of time or indefinitely. If you want the trust to hold the property indefinitely, you must speak with an experienced estate planning attorney to accomplish this goal.
- transfer the property to a special trust that owns only the property, to be held for a long period of time or indefinitely.
- transfer the property to a limited liability company, to be held for a long period of time or indefinitely.
- Instruct your trusted decision-maker to sell the property.
Can your beneficiary afford the vacation property? When you leave your property to a person (or group of people), they will become responsible for those financial obligations, such as mortgage payments (if any), utility bills, property insurance, and property taxes. If you want your beneficiary to keep the property, you must consider whether they can meet the financial obligations.
If more than one person will have an interest in the property, do they get along? Do all of your beneficiaries get along? When you are no longer living, will they still be able to come together and see eye to eye? As joint owners, they will need to discuss and agree on a variety of issues involving the property. They must also be able to communicate and equally contribute to the maintenance of the property.
How do you make your wish a reality? You must legally document your wishes. You should design a plan that allows you to set aside money and insurance to maintain the property. You need to consider the tax consequences of transferring the vacation property—whether during your lifetime or at your death.