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| Best Practices: Estate Planning |
Paradise Lost
Louise Kramer
12/01/2005
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Andrew Lee, a tax and estate
planning attorney at Howard & Howard in Bloomfield Hills, Mich., has seen
numerous estate plans that overlook the way posterity will run the vacation
home. Families imagine it will always be the place where worldly pressures end,
when in reality, when it passes to the next generation, it becomes a family
business. As with almost any business, it only develops more layers of
complexity as time passes and an increasing number of relatives become
stakeholders in the property—spouses, children and the children’s children, some
of whom may not know each other well. “You can have 30 people trying to chime in
about everything,” Lee says. “Management is the biggest issue.”
Lee
encourages his clients, as they are thinking about the terms of their estate
plans, to ask their children point-blank if they really want to own a share of
the vacation home. Everyone must be open-minded because this is an emotionally
fraught question; in many families the children are afraid their parents will be
crushed if they reject the scene of so many happy memories. It might turn out
that one child hates the five-hour drive. Another might prefer to build his own
dream retreat thousands of miles away. If only one child truly wants the
property, Lee suggests the parents apportion their other assets so that all
heirs feel they have received a fair share of the estate, assuming the parents
want to split their estate evenly.
If siblings are going to share the
property, however, trust and estate lawyers will almost always advise the
parents to create a legal entity to hold the property. In most cases a limited
liability company is the preferred structure for keeping all family members
invested in the project. Parents who are concerned that their children will not
be able to manage the property without an overseer can set up a vacation home
trust. As with all trusts, however, the terms will be difficult and expensive to
amend. Another drawback is that a trust expires when the last person named in it
dies, thus leaving later generations connected to the house—at which point, they
might be distant cousins—with no legal requirement to abide by the trust
agreement. Unless they are savvy enough to start over with their own business
strategy, chaos may blow the roof off, quite literally.
Within either
structure, parents can minimize the estate tax if they start transferring shares
of the property to the next generation early on. The government currently allows
individuals to make an annual exclusion gift valued at $11,000 per recipient.
Each parent can make this gift, and the gift can additionally be made to the
recipient’s spouse and children.
Operating Agreeably
Chris
Sega, a partner in Venable, a law firm in Washington, D.C., and a professor of
tax and estate law at Georgetown University Law Center, frequently helps
families create a formal operating agreement that will govern all procedures,
right down to the minutiae that can set siblings at war. (“You used my ski boat
without asking!”)
It might start as part of the agenda at a family meeting
and include input from everyone who will be a partner in the property. But
Huggins, in the guidebook that came from his personal experience, cautions that
it can take two to three years to work out an agreement that covers all
the details. After all, the existing informal agreement evolved over many years,
perhaps over several generations. Huggins shakes his head now over his family’s
lack of an official set of rules and procedures, believing that if they had
managed the property better, his children would be able to enjoy it even now.
“You can do all sorts of planning about legal and financial issues,” he says.
“But if your kids and your kids’ kids can’t get along, and there are arguments
about who uses it and who pays for it, all the work of the lawyers is not going
to pay off.”
Inevitably, one of the thorniest issues that an operating
agreement should address is the actual schedule of who gets to use the house and
when. The family should consider, and spell out, rules such as at what age a
child becomes entitled to use the house alone, and whether there should be open
weeks for the entire family to gather.
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