Coming to Agreement on a Shared Home
If you are considering gifting a second home to your children in equal shares, take heed. This generous offer can be riddled with complexities that you may not have considered.
Your heirs will need to agree on the management, usage, maintenance, and ultimately, the disposition of the property. Even the best intentioned co-owners will have a hard time agreeing given different incomes, the ability to maintain the home, the relative distances from the property, and the desire (or lack of desire) to spend time there.
Having helped hundreds of families through this process, I’d suggest that you avoid an arrangement where your heirs own the property outright. A legal entity that holds title will provide shelter from debt, divorce, disability, and dissipation of the asset. Outright ownership does not.
Instead, you will want each “owner” in the next generation to hold their interest in trust for their benefit, and to create an entity to hold all of their interests under one title in a nominee realty trust or a limited liability entity. For some purposes, a nominee realty trust will suffice. For valuable, multigenerational properties, limited liability entities, such as an LLC, should be adopted. The choice of legal entity is a whole subject all its own and is very specific to individual situations.
An heirloom agreement or covenant should accompany whichever legal entity is selected. The beneficiaries will benefit from the agreement’s instructions regarding property management affairs. The agreement is a restriction on the inheritance of a vacation home. It requires that all heirs must agree on the terms to inherit the property together. It they can’t, they must sell.
Typically, the senior generation drafts the agreement. Input from their heirs is optional. After the senior generation passes, the heirs can make adjustments to the agreement.
With an heirloom agreement, the inheritors are required to complete an agreement with certain minimal requirements before keeping the property long-term. The senior generation predetermines the amount of time the heirs have to sign the agreement.
A well written heirloom agreement should include provisions for:
With these provisions in place, your second home can be shared peacefully among your heirs for many years to come. We will address each one in upcoming blog posts.
Here is a checklist of considerations to make sure your heirloom or vacation home avoids conflicts over the ownership, management, or disposition of the property.
Tim Borchers, Esq., EPLS, AEP® – Tim is the author of the Heirloom Ownership Trust, Heirloom Toolkit, and co-creator of SecondHomeSavvy.com.
