Premium content from Denver Business Journal by Marilyn W. McWilliams
Many families have fond memories of the mountain house, cabin or condo that Mom and Dad bought years ago, and where they took their children for weekends and vacations. Mom and Dad also paid all the bills and made all the decisions about the place.
But what happens when Mom and Dad are gone or are in poor health, and the children have grown up and have families of their own?
What often happens is that an asset that once brought pleasure and togetherness to the family becomes a source of friction.
For example, is it fair that the child whose employer posted her to Tokyo and who can use the house only during the December holidays should pay as much of the costs as the child who lives in Denver and uses it most weekends throughout ski season and the summer?
Is it fair that the overseas child always gets to use the place for Christmas and New Year’s? What about the child who is a kindergarten teacher out of state and pays nothing to maintain the property? Does she never get to use it? If not, will she want the place to be sold — over the objections of her siblings?
What if one or more of the children prefer to rent the place to others to get extra income rather than use it themselves?
It’s unlikely that adult children of the original owners will view these issues the same way. They might if their life circumstances are nearly identical — and how likely is that?
Plan in advance to avoid disputes
Families can plan to avoid unexpected friction over vacation-home issues.
First, they must accept that life and the family will change over time. Second, there must be clear communication among family members so that everyone hears and understands the same information.
While Mom and Dad are well and healthy, they can certainly make the rules, including keeping the right to sell the place any time they wish. But while they’re young and healthy, they should establish a family-succession plan for the property.
It should make it clear what the group will do once the parents no longer can make the decisions.
There are several legal structures that can create customized plans for the property to deal with various contingencies.
- One is a trust, which can own the property and other assets sufficient to generate income to pay the costs of maintenance, repair, taxes, insurance, remodeling and homeowner association assessments for a period of time determined by the trust’s creator.
- Another is a business entity, such as a limited liability company (LLC) or limited partnership, which also can own real estate and other assets.
- A third is a simple co-tenancy agreement designed to take effect when the children become owners.
All of these legal arrangements can work well and be customized for specific family goals. Mom and Dad can establish them according to their wishes, or the family as a group can discuss the issues and design a plan that will be satisfactory to at least most of them.
It may be helpful to have a neutral facilitator for this kind of family meeting. If the family members are unable to come to an agreement, the group will know it has a problem and may need additional help to deal with it.
Any kind of agreement or legal structure should deal with certain basic issues.
The biggest disagreements seem to come from the issues of how to pay the bills, and how to decide who uses the property and when. If a trust or LLC is funded with incomeproducing assets, the issue of payment can be taken care of.
If there’s no funding set aside to pay the costs, the group needs to be honest and realistic about how much each family member can and is willing to contribute to costs. Might the more prosperous children be willing to pay the costs in exchange for a bigger share of the sales proceeds when the property is sold?
Ways to decide who uses the place and when include drawing dates out of a jar or assigning weeks to each family member, moving the weeks forward one week each year.
How and when will the property be sold?
The group also should determine under what circumstances the property will be sold.
Will family members have the right to buy each other out? At what price and under what payment terms?
Will the property be marketed to the public if any one person wants it to be? If a majority want it to be? Or must such a decision be unanimous? If so, what if no one can pay the bills but one person vetoes a sale?
What will happen if a family member is sued, divorced, declares bankruptcy? These are not easy, fun issues, and there’s no one right answer that fits all families. But they’ll be easier to deal with if the family has established a plan in advance.