by Chris Cahill, J.D., CFP®, CAP®, Principal, Family Office Services
Few assets can bring a family together like a second home. Whether it is beachfront property on Cape Cod or a house on Lake Winnipesaukee, the second home is a source of tremendous joy for many families. Imagine all of the time spent at the beach, skiing or simply sitting around a campfire listening to stories and music. Those memories can last a lifetime. The goal of many property owners is to keep the second home in the family for multiple generations. On the face of it, it seems simple.
All too often, however, the dream of the second home can become a nightmare for the family as a lack of planning, forethought and open communication can lead to family conflict, infighting and even lawsuits. Over the course of my 20 years of helping families plan for and secure their second homes, I have seen it all. The asset which was originally thought of as a safe haven, a place for everyone to congregate and to bring everyone together as a family has turned into a source of frustration, legal bills and has become the reason that siblings are no longer talking to one another. As a friend of mine said the other day, “I rarely see a family fight over a bank account, brokerage account or an IRA, but a second home can result in a knife fight if not properly planned for in advance.” It doesn’t have to be this way. With proper planning and coordination, the second home can provide all of the good aspects of property ownership that you desire for your family now and over future generations while reducing the likelihood of a negative outcome.
So, how does one become Second Home Savvy? It starts with an acknowledgment that you have an “heirloom property” that you and the family feels a deep sense of connection to. An heirloom property is often one that is cherished by the family, is commercially valuable and, consequently, deemed to be worthy of protection. It could be a multi-million dollar home on Cape Cod or a small cabin in the Berkshires. What is important is that you want to take steps to keep the home in the family. As attorney, Tim Borchers from Borchers Trust Law in Medway, says, “heirloom properties require extraordinary cooperation, coordination and financial attention.”
Next, one must spend some time determining what your specific objectives for the home really are. Write them down. Be as specific as possible. These notes can serve as the basis of a family mission statement for the property now and in the future. It is also critical to ask your children and grandchildren (if appropriate) what their thoughts are regarding the property. It makes no sense to implement a planning program for a home that your heirs are not overly interested in or cannot use given their location or lifestyle. Alternatively, you may find that some children are more interested in the home than others. When this happens, special care must be taken to ensure that the estate distributions are equalized to the largest extend possible (assuming that is the objective).
Once you have determined your objectives and goals for the home, you are ready to start planning. With the help of qualified advisors and legal counsel, you can begin investigating the myriad of strategies available to you to help accomplish the goals and objectives that you have identified for the second home.
There are many different strategies that may be used to help accomplish this objective. Some of them may be used in isolation and others may be used in conjunction with one another. There is no one size fits all planning in this arena. Customized properties call for customized planning. We will address several strategies in this introductory article. In the near future, we will delve into these strategies (and others) in more depth so that you can develop a deeper understanding and familiarity with them.
Of all of the strategies that I have come across, one of my favorites is a trust structure created by Attorney Borchers called the Heirloom Ownership Trust, or HOT Trust. The HOT Trust, when coupled with an agreement among the beneficiaries or a covenant imposed upon them by the current owners, is a vehicle that helps ensure that the property is governed wisely and remains within the family. Tim drafts what he calls AUGUST Terms into this agreement or covenant. The acronym AUGUST stands for the provisions that are essential keep the home in the family:
Allocation of ownership
Understanding of purpose
Governance
Use
Stewardship, and
Transfer
Another widely utilized strategy is to transfer the property to a Limited Liability Company (LLC). An LLC places control of the property in the hands of a Managing Member (this can be the current owners of the home, one or more of their children or a trusted advisor). By using an LLC, the current owners can gift Limited Membership shares to their children or, preferably, to a Trust for their benefit. (The trust could, in fact, be a HOT Trust with AUGUST Terms.) The Limited Members have the ability to use and enjoy the property but have no say in the day-to-day operation and management of the property. The Articles of Incorporation serve as the rules of the road for the ongoing management, use and enjoyment of the property.
Another strategy that is very popular for wealthy families concerned about Federal Estate Taxes is to transfer the property to a Qualified Personal Residence Trust (Q-PRT). A Q-PRT is an advanced planning technique used to discount the value of a gift in real estate for estate tax purposes. To do so, the property owners (called the “grantors”) make an irrevocable gift of the property to a Q-PRT. The grantors retain the right to use and enjoy the property for a period of years. At the end of the term, the property passes to the children or a trust for their benefit (here again, the remainder trust could be HOT Trust with AUGUST Terms). Since the beneficiaries will not be receiving their interest in the property for a number of years, the value of the gift is discounted for estate tax purposes.
All of the strategies outlined above require careful coordination to ensure that they operate as designed and desired. A focus on financial planning, investment management and insurance strategies (both life insurance and property and casualty insurance) are critical to achieving the desired result. In many instances, the Trust or legal vehicles described above can be thought of as a car and the financial planning, investments and insurance solutions can be viewed as the gasoline that makes the car run. In short, you need both to get where you want to go.
Hopefully you found this information both thought provoking and helpful. There will be plenty more to come in the near future as we continue to help you become Second Home Savvy. In the interim, should you have any questions about your heirloom property, please reach out to me at 978-318-9504 or via email at: Chris@TwelvePointsWealth.com
