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| Best Practices: Estate Planning |
Paradise Lost
Louise Kramer
12/01/2005
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Then there are the rules about
comportment. If one sibling is a smoker, are the others willing to tolerate
lighting up indoors? Are cocktails appropriate when children or recovering
alcoholics are present? The family should also establish consequences for
breaking the rules, Sega says. He has clients who ban family members from visits
for repeated infractions.
Just like a post-college share in a beach house or
ski condo, family vacation homes should have one person in charge as calendar
keeper and another as manager and bill payer. There should also be a provision
to replace any manager who does not keep up with the work or cannot do it. Lee
suggests a new manager be elected annually and that the calendar keeper be
rotated so that no one feels overly burdened—or overly favored.
| 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. |
There
is also a long list of financial topics the agreement should address:
Financial basics Who pays the bills? Can the next generation afford
maintenance costs? If additional funds are needed for capital improvements, who
has to contribute and how much? Will there be a user fee to pay staff and
caretakers? Does it make sense to rent out the property when the family is not
using it? Will rental money be used to cover operating costs, or distributed
among family members as income?
Whose house is it? Lee also recommends that
families determine what constitutes an owner—a family unit or individual family
member. As grandchildren become adults, they may want an equal voice in
management; the operating agreement should address whether their view on an
issue counts as a full or partial vote. There should also be rules about
ownership claims from spouses if an heir gets divorced.
Meeting the overhead
Sega suggests the manager create a budget at the beginning of every year to
account for expected changes in expenses. Then, if appropriate, each owner
should be assessed for that amount. Sega says that a vacation home typically
costs about 5 percent of its value to operate. Thus a property worth $5 million
would cost $250,000 a year to maintain. Sega recommends that parents seed the
LLC or trust with cash or income-producing assets to maintain the property for
at least a couple of years so that the heirs can have enough time to make sure
their operating plan is in place and working.
How and when to sell The
family should also decide in advance what circumstances would lead them to sell
the property and how they would do it. These decisions will require a set of
guidelines for family members buying each other out.
Unequal shares Sometimes
co-owners will agree to allow a family member who rarely uses the house to make
less of an annual contribution. If a co-owner wants to sell his share to the
others, the family must have enough cash to purchase the share; for that reason,
Lee recommends a limit on how many owners can sell at one time so as not to
create too much of a financial burden on the other owners.Family values The
owners should spell out in advance how they will value shares in the property
for sale to other members of the family, to avoid the horrors of internecine
litigation. Because these transactions do not take place on the open market, an
appraiser may value the share at 40 percent less than prevailing market rates,
Lee points out.
Illustration by Isabelle Arsenault/agoodson.com
Louise Kramer is a New York–based freelancer who writes frequently for the
New York Times.
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