Va­ca­tion Prop­erty Angst

Cer­tain plan­ning tech­niques al­low es­tate own­ers to dis­trib­ute this valu­able as­set with­out trig­ger­ing hard feel­ings and large ex­penses.

Financial Planning - - CONTENT - By Don­ald Jay Korn

Cer­tain plan­ning tech­niques al­low es­tate own­ers to dis­trib­ute this valu­able as­set with­out trig­ger­ing hard feel­ings and large ex­penses.

WHEN A WIDOWED MOTHER PLANS TO SPLIT HER mu­tual fund port­fo­lio equally among all of her chil­dren, this may be ac­cept­able to ev­ery­one in the fam­ily. How­ever, pass­ing on a va­ca­tion home in the same way can have un­in­tended con­se­quences.

“A be­quest that was well-in­ten­tioned by the par­ents could end up de­stroy­ing fam­ily re­la­tion­ships,” says Brent Brodeski, CEO of Sa­vant Cap­i­tal Man­age­ment in Rock­ford, Illi­nois. “Iron­i­cally, that’s ex­actly the op­po­site of what the par­ents de­sired when they imag­ined fam­ily re­unions each year at the lake.”

The chal­lenge, ac­cord­ing to Brooke Salvini, prin­ci­pal at Salvini Fi­nan­cial Plan­ning in Avila Beach, Cal­i­for­nia, is that some chil­dren might want to cash in their share of this valu­able as­set, while others may dis­agree.


“Some of the sib­lings may have a sen­ti­men­tal at­tach­ment to the fam­ily va­ca­tion house and want to keep it for on­go­ing gen­er­a­tions,” she says.

“When there is the where­withal, the easy so­lu­tion is a buy­out among the sib­lings. It’s harder when that isn’t pos­si­ble and the sen­ti­men­tal sib­lings are forced to sell. That has left hard feel­ings in the fam­ily,” Salvini says.

A need for cash isn’t the only ob­sta­cle that can arise. Brodeski has seen sit­u­a­tions where one heir lives too far away to visit fre­quently, or one child has bad mem­o­ries of be­ing dragged to the va­ca­tion home.

He has also seen sit­u­a­tions in which one heir has a spouse who doesn’t want to use the va­ca­tion home, or one heir who is un­mar­ried and with­out chil­dren has no use for a large va­ca­tion home.

“When such a home passes to the chil­dren,” he says, “most of­ten there is some com­bi­na­tion of one kid who loves it and uses it while at least one other does not. Then the sib­lings who want to get rid of it are frus­trated.”

If ad­vis­ers get in­volved while orig­i­nal va­ca­tion home­own­ers are still alive and healthy, quite a bit of frus­tra­tion can be avoided.

“It’s dif­fi­cult for the heirs to make de­ci­sions af­ter the death of the par­ents,” says Erika Safran, founder of Safran Wealth Advisors in New York. “That’s par­tially be­cause of likely un­equal fi­nan­cial lives, and par­tially be­cause of emo­tional at­tach­ment to the prop­erty that rep­re­sented their par­ents and their youth. Prob­lems can be avoided by some thought­ful con­ver­sa­tions and for­ward plan­ning.”


Safran is cur­rently work­ing with a cou­ple who has a va­ca­tion home that the fam­ily en­joyed for years while the chil­dren were young.

“Now their col­lege-age kids have no de­sire to use the home, so the par­ents won­der if they should keep it for fu­ture gen­er­a­tions or if they should sell the house, which has ap­pre­ci­ated sub­stan­tially,” Safran says. “This cou­ple can af­ford to hold onto the home, so sell­ing to raise cash is not nec­es­sary.”

Safran ad­vised the par­ents to hold onto the house, con­tinue to use it pe­ri­od­i­cally and per­haps rent it out when it is

not in use.

“Years from now, when the kids are es­tab­lished in their ca­reers, the fam­ily can re­visit the keep-or-sell de­ci­sion,” Safran says. “Sell­ing the prop­erty would cre­ate a siz­able tax li­a­bil­ity on the gain.”


A va­ca­tion home sale does not qual­ify for the $250,000 cap­i­tal gain ex­clu­sion ($500,000 for mar­ried cou­ples fil­ing jointly) that may ap­ply to sales of a prin­ci­pal res­i­dence. “In­stead, a large gain on a va­ca­tion home might be taxed at the top 20% rate on longterm cap­i­tal gains, plus the 3.8% sur­tax on net in­vest­ment in­come and per­haps the state in­come tax as well.

How­ever, “main­tain­ing the va­ca­tion prop­erty and leav­ing it to the heirs does not cre­ate an in­come tax bill,” Safran says. In­deed, cur­rent law pro­vides a ba­sis step-up to the date of-death value, elim­i­nat­ing cap­i­tal gain tax on prior ap­pre­ci­a­tion.

“Once the kids are older, fam­ily com­mu­ni­ca­tion while both par­ents are alive is a key to mak­ing de­ci­sions ev­ery­one is happy with,” Safran says.

“The kids might want to share the house and main­tain it. If one child is not as fi­nan­cially se­cure as the other, he may want to in­herit cash in­stead of the prop­erty,” she says. “If that de­ci­sion is hon­ored by the par­ents, they can put into their es­tate-plan­ning doc­u­ments that one child will get the house and the other will get an equiv­a­lent value of other as­sets, based on an ap­praisal at the time of death. That would be fair.”

Ac­cord­ing to Brodeski, it is “very typ­i­cal” that one child buys the fam­ily home from the es­tate or the par­ents and one or more sib­lings buy their own va­ca­tion home, per­haps with an in­her­i­tance from the par­ents.

“Then the sib­lings can main­tain a great re­la­tion­ship,” Brodeski says, “be­cause they don’t need to pick up each other’s stuff at the house and arm-wres­tle over who uses it when.”


In some cases, Brodeski sug­gests, es­tate plan­ning doc­u­ments could call for a 10%to-20% dis­count from ap­praised value on an in­trafam­ily sale, if the deal avoids a sales com­mis­sion and the pre­sale fix-up costs that might oc­cur on a sale to an out­sider.

An­other pos­si­ble tac­tic is to move the va­ca­tion home into a trust, which can pro­vide on­go­ing man­age­ment, con­trol and op­er­at­ing funds.

“I’ve had some clients put the va­ca­tion house into an ir­re­vo­ca­ble trust to re­move it from their es­tate,” Salvini says. “How­ever, this has cre­ated cap­i­tal gains tax chal­lenges for the chil­dren later on, as they will lose the ba­sis step-up.”

“I’ve sug­gested they dis­cuss with their at­tor­ney the pros and cons of de­cant­ing the trust [mov­ing the as­sets to a new trust, with dif­fer­ent terms],” Salvini adds.


Less-for­mal ar­range­ments can be built into a client’s es­tate plan, in­clud­ing ideas on how to han­dle the in­her­ited home.

Such sug­ges­tions also can help ad­vis­ers who have clients in the next gen­er­a­tion of a fam­ily.

“One of my clients does the book­keep­ing for the fam­ily home,” Salvini says. “As a group, they keep one check­ing ac­count to pay all the re­lated bills. Once a year, they

Es­tate plan­ning doc­u­ments could call for a 10%-to-20% dis­count from ap­praised value on an in­trafam­ily sale.

cal­cu­late the an­nual daily cost for the pre­vi­ous 12 months and di­vide the amount ac­cord­ingly, per us­age among the sib­lings, to re­plen­ish the ac­count, plus a sur­plus for ma­jor re­pairs and main­te­nance.”

“Thus, the costs are pro­rated by days of use. The costs of un­used days are di­vided equally among the sib­lings,” Salvini says.


Brodeski tells of an­other op­er­at­ing method, de­vised by two sib­lings who share a fam­ily lake house.

“They both wanted to keep it,” Brodeski says, “but shar­ing it was not work­ing. In­stead, both sib­lings get exclusive use of the home for 12 months at a time.

“Then they trade. When their turn comes, they ac­tu­ally take down the other’s pic­tures and re­move many of the fur­nish­ings, put­ting up their own pic­tures and in­stalling other things,” he says.


Other plans for deal­ing with, or dis­pos­ing of, a fam­ily va­ca­tion home may emerge from pru­dent plan­ning.

“With my clients,” Salvini says, “I push for get­ting the fam­ily to­gether for a se­ries of con­ver­sa­tions about fi­nances, well in ad­vance of any health prob­lems that could force a quick de­ci­sion.

“A fi­nan­cial ad­viser can be very help­ful, act­ing as a neu­tral meet­ing fa­cil­i­ta­tor, Salvini says.

“For com­pli­cated fam­ily wealth sit­u­a­tions, in­clud­ing es­tate plan­ning for a va­ca­tion home, a pro­fes­sional fa­cil­i­ta­tor can bring valu­able soft skills to the ta­ble,” Salvini adds.

“A fi­nan­cial ad­viser can be very help­ful, act­ing as a neu­tral meet­ing fa­cil­i­ta­tor,” says Brooke Salvini of Salvini Fi­nan­cial.

Don­ald Jay Korn is a con­tribut­ing writer for Fi­nan­cial Plan­ning in New York. He also writes reg­u­larly for On Wall Street.


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