What to Do With the Family Compound?
Does your family have a place where everyone (including those distant cousins) gathers for summer vacation, holidays or weekends? If that place is not the primary residence of any one family member, you may have a ‘family compound’.
I know a hairdresser who uses her parents lake home and helps maintain it. Her parents own it and pay the taxes and utilities, but it is most often used by the next generation and their kids. This is her family compound.
The grandfather of one of my daughter-in-laws left his family a fishing cabin on a different lake. It was kept in the family when he died, but is owned by one of the other relatives – after being offered to my daughter-in-law to purchase. The current owner lets family members use it so it still is kind of a family compound.
The Bush’s (the Presidents) have a family compound in Maine. It was purchased in 1903 by the great-grandfather of the elder Bush and is currently owned (guess) by George H. W and Barbara Bush. Family members have been going there for generations to relax and engage with each other. It looks like quite a nice place and it set me to wondering how the family passed it from generation to generation and how they handle things like who pays for maintenance and who gets to use it at what times.
We own a vacation condo and aren’t at all sure if we will keep it until we die at this point. Even if we do, our heirs may not want to hang onto it. But if they do, something needs to be done to ensure it passes easily and without creating relationship difficulties for them!
According to Vacation Homes: Keeping them in the family on Nolo if you leave your ‘Family cottage’ directly to multiple heirs it can cause issues. Some of the heirs may not want to keep the cottage and can force a sale, even if the other heirs want to keep it in the family.
Any piece of real estate has ongoing costs involved. There are things like real estate taxes, maintenance, home or condo association dues, utility costs, management fees and etc. Vacation condos are particularly prone to high ongoing costs, due to the resort like features many have with the consequently high association dues.
It may be that some of the heirs cannot afford their part of the ongoing costs. I know that hairdresser foots the bill for a lot of the maintenance because her siblings can’t or won’t ante up.
It may be that some of the heirs live too far away, or prefer to spend time elsewhere and just won’t be using it.
It may be that some of the heirs don’t want to hassle with the property because they like to keep things simple.
Assuming you are the first owner of your ‘family compound’ and bought it to establish a fun spot for family members to gather and build memories, you may want to ensure that it stays in the family.
So, what do you do with the family compound in your estate plan?
Put it in the name of a limited liability company.
One of the requirements of setting up an llc is that you draw up an operating agreement. Sit down with your heirs and discuss scheduling, how expenses will be handled and how much each party chips in, who can have ownership, how to get out of ownership, whether or not the heirs can put a mortgage on it, whether it will be rented out, who will handle the renting, who will get the proceeds, who will pay the bills and etc.
You will need to get a new title to the property in the name of the llc instead of whatever name you have it in now. In some states, this might trigger a transfer tax of some sort, so check into it first.
Then, you will distribute shares in the llc to the people you want to include. Remember that the IRS may consider these shares to be gifts so be careful in the amount and value of the shares distributed each year if you don’t want to use up any of your Unified Gift and Estate Tax Exclusion.
Once you have the company set up and the agreement created, don’t forget to have an annual meeting once a year and document the results. This is one requirement some states have for companies. Your state may have others.
One disadvantage of titling the property in an llc is that the company will need to file a tax return each year and distribute K-1’s to each partner in the company.
Arrange for funding to provide for those ongoing costs for a specified period of time following your death.
If you have the assets available, you can also open an account in the name of the llc and place enough money in it to maintain the family compound for a selected period of time.
Pass it along to the heir most interested in it.
If one of your children has consistently demonstrated that they enjoy the compound and use it with frequency, then ask if they want to take guardianship. Explore with them how they would feel about continuing to invite other family members to use it occasionally.
Also explain why you are doing that to the other potential heirs – especially if they won’t get equivalent assets, or you may be creating a situation where your heirs will contest the estate plan after your death.
Specify its sale after your death and the assets disbursed.
In your will or trust, you could specify that the compound be sold. If you already have the real estate titled in the name of an llc (as we do our condo), you could set up the operating agreement to specify what happens to your shares.
Ours is currently set up to dissolve the llc and sell the condo as part of the dissolution.
See Forbes article: The Family Cabin, Private Retreat or Isolated Battleground? for even more info.
Remember: I am not a professional estate planning lawyer, consult one regarding your own situation before acting on information in this post.