Handing Down Your Vacation Home

As you toss that Frisbee outside your beach house, are you struck with the hope that your grandkids will have similar good times there? It's time to start planning. If you fail to take the right steps to ensure your vacation home's future ownership — through your estate plan — you may be opening up a Pandora's box of painful family disagreements.

How to be sure you're making the best decisions for your family? First, ask yourself if all your kids want the house. While your vacation home holds strong sentimental value that you want to preserve, maybe some of your family members don't want to own it. Consider these two points:

• For heirs, thoughts about how far they have to travel to visit the home and whether their income can support upkeep, taxes and other costs may be looming large.
• A biggie: If the home makes up the bulk of their inheritance, maybe they'd prefer or require a more liquid asset.

Assuming your heirs want the house, you can leave it outright in your will to the children or family members you wish to inherit it. Your estate transfers the deed to each person you cite to own an equal portion. But what seems simple to you may lead to complexities for your heirs, as well as disagreements and resentment.

Equal ownership means all owners would have a say in all decisions concerning the home — when each can use it; whether to rent it out or sell it, and at what price; as well as what projects to invest in to fix it up. Each owner would bear equal responsibility to pay for the costs.

The trust solution

You can address many inheritance issues by leaving the vacation home in a trust:

• You select a trustee to be in charge of decisions concerning the home.
• Heirs become beneficiaries of the trust, with usage rights to the home that you specify
• The trustee makes the ultimate decisions concerning the property

You will incur costs setting up the trusts, plus the trustee may be entitled to annual compensation. However, you can leave extra money in the trust to cover operating costs. Add up how much it may cost to operate the vacation home for a year and include things like real estate taxes, insurance, and utility bills.

Making use of life insurance

As you plan your estate and set up any necessary trusts, note that life insurance funds buyouts of a departing owner. A policy can fund the purchase of ownership interests — some life insurance policies let you borrow from your policy. You can then use the cash to buy out the others' shares.

Using a cash policy loan from life insurance is a great option, as it can provide needed liquidity when one shareowner wants out, letting you fund payments to the other owners. The income buildup on the accumulation in the account is tax-deferred.

The key thing to realize is that owning a family vacation home is great, and planning to pass it on to your family shows your desire to see that generations to come have the opportunity to enjoy it. Take steps to assess whether it's the right thing for all your heirs to inherit, ensuring that it's cared for over the years. It's advisable to meet with qualified professionals to make that a reality.