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The West Michigan region is the home of countless vacation homes, family cottages, cabins and lakeshore retreats beginning in New Buffalo and continuing all the way to the Mackinac Bridge along with numerous spectacular inland lakes. All of us have friends or family that have grown up at these vacation destinations often involving three or more generations. The attorneys at Duba & Duba, PLLC have depth and experience drafting agreements, limited liability company operating agreements and essentially ground rules for the use, contribution to and ultimate divestment of such family properties and are available to consult and coordinate issues and complicated matters arising under such ownership. Given the sensitive nature of family vacation properties several topics seem to arise in every case, including:
The Decisions Makers. If parents own the vacation home and share it with their children and grandchildren, a plan should outline how often the parents expect to use the home on their own, who else has access to the home and how often. When a vacation home is owned by siblings or other family members, a mechanism is necessary for making group decisions. One of the best ways to do this is through a legally binding written agreement that outlines specific rules on who makes decisions about the property and how to split costs. The agreement also typically leaves future decisions, such as renovations, to a committee vote.
Passing It On. Parents should include a vacation home in their estate planning. Among the considerations: Which children (or grandchildren) are interested in continuing to use the home, whether those with a bigger stake in the vacation home should get a smaller portion of another asset, and how to compensate children or grandchildren who have made an investment in the home.
One way to pass down a vacation home is to create a limited-liability company that will own the home. The home will be subject to the ground rules of an operating agreement. A limited liability company also protects the owners from personal liability.
You also may want to help your heirs pay for the house's upkeep. A trust could own the house and receive the payout from a life insurance policy. That money will cover the cottage's expenses.
Creating a Schedule. One of our biggest challenges undoubtedly is divvying up the time, especially summer weekends and holidays. So it is important to create a fair scheduling system.
Paying the Bills. Outline the home's expenses – mortgage (if there is one), taxes, insurance, utilities, water bill, etc. – and how they will be paid each month. It typically works best if one person is in charge of paying the bills. But that person should present an accounting to all members periodically. Also, stipulate whether all family members will contribute to supplies – think cleaning products and toilet paper – or will one person be charged with buying them and getting reimbursed for the expense.
Renting It Out. Some families rent out a home part of the time. Any rental money should be going to a communal fund that is used solely for vacation-home expenses.
Keep in mind that under the U.S. tax code, you can rent your home tax-free for no more than fourteen days a year, even if the home is owned by multiple people. See Publication 527 on the Internal Revenue Service website (www.irs.gov).
Set Ground Rules. Do not leave any details to chance – or future misunderstanding. Outline the condition that the home must be left in, say clean bathrooms, dishes, sheets, towels. Set rules for children, young adults, visitors and pets.
Punish Rule Breakers. Rules will not hold much weight without consequences for breaking them. An operating agreement should include repercussions for major infractions, such as not paying agreed-upon expenses or engaging in criminal activity at the house. Minor infractions, say being too noisy or sloppy, can be handled on a case-by-case basis.
If you or your family desire consultation on these or other issues related to a family vacation residence, please contact the attorneys at Duba & Duba, PLLC.
The topics contained in this article are intended to be general and representative in nature and not specific legal advice for any particular circumstance. Please feel free to contact Duba & Duba, PLLC to inquire about an analysis of your particular facts and circumstances.