Owning and managing a family vacation property between generations requires you to consider more than just the tax questions.
To most families who own a vacation property, that space represents more than just a building or an investment. It has sentimental value as well. It's a place where memories are made and family bonds grow stronger.
For this reason, you must consider all elements of owning and maintaining a vacation property when you plan for the future, and the eventual transfer of ownership. These conversations could take place as you draft or update your Will, or plan out your retirement.
Often families who own vacation properties think only about the tax considerations when transferring ownership of the property to the next generation. While tax efficiency is extremely important and deserves careful planning, you need to look beyond taxes to see the whole picture.
In the same way your vacation property is more than just a building, accountants with the proper training and experience can help you with more than just the numbers. It's one of the reasons MNP invests in having a Family Office service line. Family Office practitioners specialize in making the numbers and the human elements of family wealth work together in harmony.
What to consider
Consider this common example — let's say you're a married couple with two children hoping to transfer ownership of the family vacation property to the next generation. You've met with your tax advisor and devised a plan for a tax-efficient transition of the property. There are still questions you need to consider that go beyond the dollars and cents.
Some points you will need to clarify, include the following:
- Who will hold the keys to the vacation property?
- How will they split usage and share time?
- How important is keeping the vacation property within the family? Do the children even want to take on the responsibility of owning and looking after it?
- Do you need controls to prevent your children from immediately selling it?
- How will the costs of repairs and insurance be shared?
- What happens if there is an eventual wealth disparity between children? Will costs still be evenly split?
- What if one sibling later decides they want out, leaving only one sibling with all responsibilities and costs?
The ideal situation is for your family to answer these questions together and build consensus. However, as your children become adults, their needs and priorities are subject to change. Having a third party facilitate these discussions is sometimes necessary. A Family Office practitioner can be that third party.
It's important that you don't delay these conversations too long. They can be uncomfortable or contentious, depending on the nature of the relationships in your family, but the consequences of waiting too long are usually worse.
Many families don't talk seriously about intergenerational transfers of the vacation property until the current owners pass away. Don't let that happen to you! At this point certain planning opportunities are lost. Relationships within families can change significantly after parents pass away. These conversations are best held with the current owners and the future owners in the same room.
The importance of a co-ownership agreement
A co-ownership agreement is a document that outlines as many details as possible, big and small, about your vacation property's ownership and stewardship. Its purpose is to reduce conflicts and foster peace of mind through agreed-upon procedures and rules.
Some things you should consider adding to your co-ownership agreement:
- The process for making decisions
- The process for resolving conflicts
- The rules for the use and maintenance of the property, and what happens when rules are violated
- Financial data showing how much money each sibling will need to commit now and in the long term
- Backup procedures for unplanned events or emergencies
- Buyout options and process
While you may look at the prospect of a co-ownership agreement as excessive and burdensome, it plays a crucial role in mitigating conflict in the future. It also fosters quick and prudent decision-making for any unplanned events or crises, for example: a significant repair, a death in the family, divorce, or financial hardship.
Many families assume that surely their family would not have significant conflicts, or if they did, they would be able to resolve them on the fly without needing a written agreement. These assumptions are usually predicated on the strength of family bonds. However, when family members pass away and money gets added to the mix, you should never assume that family relationships will remain as they are now.
The people behind the numbers
Every family is different, and the future ownership and stewardship of your family vacation property is a matter of preference. You have a myriad of options for what to do with it: You can sell it, gift it, transfer it in your Will, hold it in a private corporation or family trust. A Family Office practitioner can help you weigh the pros and cons of each approach, both from a financial and a human perspective.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.