The Lake House that Kept Us Close Is Going to Tear Us Apart

Q:

My wife and I have owned our lake house for decades, and you can imagine how many of our family’s memories are tied to it. She wants to hand it down to our three kids as joint owners. But I can already tell from comments they’ve made that they have completely different impressions of how that’s going to work.

One keeps bringing up what other nearby homes are selling or renting for, one changes the subject every time, and the other has little kids and thinks they’ll keep on using it every weekend and summer break. (This is totally in keeping with our overall family dynamic, by the way.) How can I get my wife to see reason, and how are we supposed to handle this? Someone’s going to be really unhappy.

A:

This question gets to the heart of why we go through the expense and trouble of estate planning. It’s not really for your own sake. It’s for the people you’re going to leave behind.

There’s the part of estate planning that’s all about taxes and protecting the money, and that’s important, but it’s also about relationships and the love you have for the most precious people in your life. It’s heartbreaking to think about a rift in your family, and over a vacation house. You’re smart to be thinking about ways to stop it now because there (obviously) will be nothing you can do about it later.

WHY SECOND HOMES ARE TRICKY

Vacation homes can be especially challenging. They can’t really be split (in the sense that each person can’t individually decide what to do with their part), and there are more options than there would be with your main home (which is likely to be sold since everyone presumably has a place to live already).

The best thing you can do at this point is openly communicate about it. You need to share your thoughts with your kids, and you need them to openly and honestly share theirs – with you and each other – as well.

But you’ll need to do some prep work before that happens in order for it to go as smoothly as possible.

You’ll need to be ready to manage potential emotional landmines. Maybe someone is perceived to be the “favorite” who always gets what they want. Maybe someone isn’t in as good a financial position and will feel judged for wanting money more than the house. Maybe someone is prone to shutting down when they’re uncomfortable. You mentioned family dynamics, so you probably already sense what the danger zones are for your family.

DIGGING INTO THE PSYCHOLOGY BEHIND THIS DECISION

Interestingly, your family are good examples of a few of the archetypes that we see when it comes to inheriting something like a vacation home.

• The Protector wants the continuity and security that comes with preserving things as they are.
• The Connector wants to strengthen relationships through shared family experiences.
• The Avoider doesn’t want to make unpleasant topics more “real.”
• The Builder wants the feeling of control that can come from taking advantage of financial opportunity.

None of these are right or wrong, better or worse. They’re all valid responses to a hard decision. You should acknowledge and empathize with them, and you may even need to help everyone understand their own feelings.

OPTIONS AND THEIR IMPLICATIONS

In the same conversation or a follow-up – depending how things go – you’ll also need to ensure your kids have really thought about the practical implications of each option.

If they sell the house:

What’s a reasonable amount they could expect to net from the sale? What will it feel like to know the house is gone for good?

If they rent the house:

What are the ongoing costs associated with it? What work needs to be done to take the house from family haven to moneymaker? Who will be putting time into managing the rental? What’s the potential rental income and how will it be split? What are the tax implications? How often will your family still be able to use it, and when?

If they keep the house for personal use:

Who will maintain it? Who will make decisions about maintenance or upgrades and how will they be paid for? What are the taxes, insurance and other costs? How will they decide who has access when? What if one person has less opportunity or desire to use it than the others? What happens if one sibling passes away – do their children inherit their share of the house and the corresponding rights and responsibilities? Who gets the primary bedroom? (Seriously.)

It's also important for everyone to recognize that your kids’ situation now may not be their situation later. For example, someone who wants to keep the house so they can continue making family memories could get laid off, divorced, relocated across the country or otherwise find that the house is now a burden, not a joy.

HOW TO MOVE FORWARD

Let’s say after all is said and done, your children still want different things. Then it’s time to look at potential solutions that might honor differing wishes.

For example, could the child who isn’t interested in keeping the house opt out and instead inherit more of your liquid assets? Or could ownership be structured in a way that would allow your children the right to buy out the share of siblings who wish to sell in the future?

What you don’t want to do is either:

• Leave it to them as shared owners anyway and let them figure it out.
• Decide to just prioritize your own wishes and simply direct that they either sell or use it. Simply knowing what you wanted may not be enough to end the discussion and stop your children from falling out.

If it truly seems like the different goals can’t be resolved, think about bringing in a mediator or facilitator to help. Your financial planner can help fill the role of a neutral third party to make sure everyone feels heard and understood.

DOCUMENTING THE DECISION

Once a decision is made, it’s critical to make sure your estate plan is set up to best support that decision. It could mean any or all of these:

• Updating your will to make clear how the house should be transferred or disposed of at your passing
• Creating an irrevocable trust to hold the house when you and your wife pass, and funding it with liquid assets to support the maintenance and upkeep of the home for a few years
• Creating an LLC and custom operating agreement with direction as to how the house will be managed and maintained, decisions will be made and disputes resolved
• Providing your children with a right of first refusal to purchase the house from your estate

Quick note: If you decide that the best thing to do is sell, be aware that if you sell the property while you’re alive, you may owe significant capital gains tax – there’s no federal exemption for vacation property. On the other hand, if the home is part of your estate, the cost basis will be stepped up to its current value at that time. If so directed by your will, your executor could then sell the property ideally with minimal gains.

These are complex documents and decisions, and we strongly advise you to draft and implement them with your estate attorney and tax professional.

WE’RE HERE WHEN YOU NEED US

Here's the good news: Nearly everybody is likely to prioritize preserving relationships over property. It sounds like you have a very close family who value spending time together. That time may look different in the future, and that may be hard for some family members to come to terms with, but life will go on. You can help by sharing your own wishes now and making sure everyone else’s wishes are heard too, taking your estate plan “from mess to meaning.”

Your financial planner and our in-house experts are here to work with your estate planning attorney as you build or revisit your estate plan. Reach out whenever you need us.