Articles

A vacation property can be one of the most valuable things you can pass down to your loved ones, from both a sentimental and financial standpoint. However, mixing money and family can be tricky. Without a well-thought-out strategy for the ownership transition, hard feelings and disputes could arise, and the vacation home could be used in ways you did not intend. Beyond family dynamics and legacy objectives, transferring a vacation property to the next generation also has legal and tax implications that need to be addressed in an estate plan.

Vacation Homes Are a Store of Memories—and Wealth

It is that time of year when you and your loved ones may be preparing to spend time on the beach or in the mountains at the family vacation home. Around 5 percent of all housing units in the United States are second homes. There was a more than 16 percent surge in new vacation home purchases during the pandemic.[1] From humble cabins and beach cottages to luxurious mountain estates and lake houses, vacation homes are owned by an estimated 4 out of 10 Americans.[2]

Many second homes are dual-purpose, serving as a family gathering spot as well as a revenue source. Sites like Airbnb and VRBO have made it easier to rent out property. In 2023, the US short-term rental market, comprising more than 785,000 individual hosts, 2.5 million available listings, and 207 million nights stayed, generated approximately $64 billion in revenue.[3]

Vacation Home Estate Planning Considerations

As you clean up your vacation home and prepare to welcome your children, grandchildren, and other family members for another season of memory-making moments, estate planning may be a distant thought—if it is even on your mind at all.

But ensuring that the home remains a place for the family to gather for generations to come requires addressing it in your estate plan now, while you still own and control it. Here are some points to consider as you balance finances, feelings, and fairness in your vacation home estate plan:

• Are you still spending time at the vacation home? This can affect whether you pass the home to your loved ones now or after you die. It is not an all-or-nothing proposition, though. You could establish what is called a life estate that allows you to transfer the vacation home at death but continue using it during your lifetime.
• Who is interested in the property? There might be interest among all your children in keeping the property, only one child who is genuinely interested in owning and using it, or nobody interested in it at all.
• Do you want to set limits on what can be done with the property? Think about whether the vacation home can be used as a rental, if family members should have the right to sell the vacation home or their interest in it to people outside the family, the conditions for one family member buying out another's interest, and other limits on what can and cannot be done there.
• How compatible are your loved ones? If everybody gets along and has similar income levels, you might not be concerned about their ability to equitably divide ownership rights and responsibilities. But disagreements could still arise over things like who is responsible for paying for upkeep, taxes, and insurance, and who can use the property—and when. And the more family members there are who have a right to use the home, the greater the potential for conflict.

These big picture estate planning issues for a vacation home can inform specific strategies such as the following about how to pass the property down:

• Selling the home to a family member
• Gifting the home to family during your lifetime
• Passing down the home to loved ones through the probate process via your will
• Transferring the property outside of probate, either while you are alive or after your death, with a trust or a transfer-on-death or pay-on-death deed (if your state recognizes them)
• Creating a limited liability company (LLC) or family limited partnership (FLP) to own the vacation home

Each of these strategies has a different set of pros and cons that you should further discuss with an estate planning lawyer.

Talk to a Lawyer About How Best to Keep a Vacation Home in the Family

Family can be complicated. Adding a treasured family vacation home to the mix only adds to the complications.

We recommend talking to your loved ones about the vacation property. Once you get answers to questions like who wants the vacation home, how much they might use it, and if they can take on ownership responsibilities, reach out to us to create a strategy that aligns with your personal circumstances and objectives.

[1] Theresa Landicho, 17 Second Home Statistics Every Investor Should Know in 2024, Fit Small Bus. (Feb. 13, 2024), https://fitsmallbusiness.com/second-home-statistics.

[2] Andrew Lisa, 40% of People Have Vacation Homes: Where You Can Find One for Your Budget, GoBankingRates (June 16, 2023), https://www.gobankingrates.com/investing/real-estate/where-to-find-vacation-home-in-your-budget.

[3] 2023 Short-Term Rental Statistics You Need to Know, AirDNA (Jan. 28, 2024), https://www.airdna.co/blog/2023-short-term-rental-statistics-key-numbers-to-know.

Although we may not always recognize it, financial decisions and tasks are a part of our everyday lives. They range from daily spending habits to more complex retirement planning.

You may take for granted that you are able to manage your finances. However, what if you become incapacitated (meaning that you lack the ability to handle your own affairs due to illness, injury, cognitive decline, or some other cause)? Someone else will have to manage your finances for you if you cannot.

If you have an updated estate plan that names a substitute decision-maker to act in your stead, you have control over who that someone is. Otherwise, the court will appoint a financial decision-maker, and it may not be who you would want—or who has your best interests in mind.

Guardianship or Conservatorship versus an Estate Plan

Two-thirds of US adults do not have an estate plan,[1] which effectively means that they lack an incapacity plan (a plan for how their affairs will be managed if they cannot do it for themselves).

You may have created a will and completed other estate planning tasks, such as purchasing life insurance and making beneficiary designations. However, you still need a documented, legally enforceable process and plan for determining who will manage your affairs if you become incapacitated.

To proactively grant the necessary powers to a financial decision-maker, consider a revocable living trust and a financial power of attorney.

• A revocable living trust allows you to serve as trustee of the trust (in charge of managing the money and property owned by the trust) while you are still able. You can also name a successor trustee to take over trust management if you pass away or become incapacitated. The trust agreement can specify who determines whether you are incapacitated and can also contain detailed instructions about how the successor trustee should manage the trust.

One of the main purposes and benefits of a revocable living trust is to avoid the court-supervised probate process, but it can also be used to help avoid a different form of court intervention: the appointment of a legal guardian or conservator (the term may vary by state), which is the person appointed by the court to make financial and other decisions for you.

• A financial power of attorney is another estate planning tool that can help avoid court intervention if incapacity strikes you. It gives one person (the agent or attorney-in-fact) the authority to act on behalf of another person (the principal) regarding their financial matters.

A financial power of attorney is highly flexible. It can include a statement describing how incapacity will be determined and who determines it; it can come into effect only when the principal's incapacitation is confirmed (in some states); it can specify the powers granted to the agent; and it can be limited or long-lasting in duration. Like a revocable living trust, a financial power of attorney helps eliminate the need for court-appointed guardianship or conservatorship.

Factors When Choosing a Financial Decision-Maker

When choosing a financial decision-maker, you should consider factors such as trustworthiness, financial knowledge, and the ability to handle responsibilities under pressure. The person selected should have a strong understanding of your values and priorities, be organized, and communicate effectively with other key parties, such as family members or advisors. Additionally, they should be available and willing to serve in this role, as it may require significant time and effort, particularly during complex situations.

If nobody in your immediate circle of friends and family seems like a good candidate, a professional, such as an attorney or financial advisor, can be chosen. However, many professionals are hesitant about serving in the role of an agent under a durable power of attorney, so you may want to consider other professionals, such as professional caregivers or fiduciaries. A professional trustee or agent is different from a professional guardian or conservator because it is a person of your choosing rather than the court's.

The bottom line is that estate planning lets you manage incapacity in advance, in the manner that is best for you, your finances, and your family. You are free to name whomever you want to serve as a successor trustee or an agent under your financial power of attorney and to provide whatever instructions you want for them in your estate plan.

You may never need to rely on an incapacity plan. However, having the right people and provisions in place gives you added protection and peace of mind just in case something happens and you lose financial capacity. For guidance on this front, call us today at 336-373-9877 to set up an appointment.

[1] Rachel Lustbader, 2024 Wills and Estate Planning Study, Caring.com (July 30, 2024), https://www.caring.com/caregivers/estate-planning/wills-survey.

As a parent, you are responsible for the care of your minor child. In most circumstances, this means getting them up for school, making sure they are fed, and providing for other basic needs. However, what would happen if you and your child's other parent were unable to care for them?

It is important to note that if something were to happen to you, your child's other parent is most likely going to have full authority and custody of your child, unless there is some other reason why they would not have this authority. So in most cases, estate planning is going to help develop a plan for protecting your child in the event that neither parent is able to care for them.

What If You Die?

When it comes to planning for the unexpected, many parents are familiar with the concept of naming a guardian to take care of their minor children in the event both parents die. This is an important step toward ensuring that your child's future is secure.

Without an Estate Plan

If you and your child's other parent die without officially nominating a guardian to care for your child, a judge will have to make a guardianship decision. The judge will refer to state law, which will provide a list of people in order of priority who can be named as the child's guardian—usually family members. The judge will then have a short period of time to gather information and determine who will be entrusted to raise your child. Due to the time constraints and limited information, it is impossible for the judge to understand all of the nuances of your family circumstances. However, the judge will have to choose someone based on their best judgment. In the end, the judge may end up choosing someone you would never have wanted to raise your child to act as your child's guardian until they are 18 years old.

With an Estate Plan

By proactively planning, you can take back control and nominate the person you want to raise your child in the event you and the child's other parent are unable to care for them. Although you are only able to make a nomination, your choice can hold a great deal of weight when the judge has to decide on an appropriate guardian. The most common place for parents to make this nomination is in their last will and testament. This document becomes effective at your death and also explains your wishes about what will happen to your accounts and property. Depending on your state law, there may be another way to nominate a guardian. Some states recognize a separate document in which you can nominate a guardian, and that document is then referenced in your will. Some people prefer this approach because it is easier to change the separate document as opposed to changing your will if you want to choose a different guardian or backup guardians.

What If You Are Alive but Cannot Manage Your Own Affairs?

Although most of the emphasis is on naming a guardian for when both parents are dead, there may be instances in which you need someone to have the authority to make decisions for your child while you are alive but unable to make them yourself.

Without an Estate Plan

Not having an incapacity plan in place that includes guardianship nominations means that a judge will have to make this judgment call on their own with no input from you (similar to the determination of a guardian if you die without a plan in place).

With an Estate Plan

A comprehensive estate plan can also include a nomination of a guardian in the event you and the child's other parent are incapacitated (unable to manage your own affairs). Although you are technically alive, if you cannot manage your own affairs, there is no way that you will be able to care for your minor child. This is another reason why having a separate document for nominating a guardian (as described above) may be preferable to nominating guardians directly in a last will and testament. Because a last will and testament is only effective at your death, a nomination for a guardian in your will may not be effective when you are still living. However, a nomination in a separate document that anticipates the possibility that you may be alive and unable to care for your child can provide great assistance to the judge when evaluating a guardian. Depending on the nature of your incapacity, this guardian may only be needed temporarily, with you assuming full responsibility for your child upon regaining the ability to make decisions for yourself.

What If You Are Just Out of Town?

Sometimes, you travel without your child and will have to leave them in the care of someone temporarily. While you of course hope that nothing will go wrong while you are away, it is better to be safe than sorry.

Without an Estate Plan

Without the proper documentation, there may be delays in caring for your child if your child were to get hurt or need permission for a school event while you are out of town. The hospital or school may try to reach you by phone in order to get your permission to treat them or allow them to attend a school event. Depending on the nature of your trip, getting a hold of you may not be easy (e.g., if you are on a cruise ship with little access to phone or email). Ultimately, your child will likely be treated medically, but the chosen caregiver may encounter additional roadblocks trying to obtain medical services for your child, and they may not be able to make critical medical decisions when needed.

With an Estate Plan

Most states recognize a document that allows you to delegate your authority to make decisions on behalf of your child to another person during your lifetime. You still maintain the ability to make decisions for your child, but you empower another person to have this authority in the event you are out of town or cannot get to the hospital immediately. This document allows your chosen caregiver to make most decisions on behalf of your child, except for consenting to the adoption or marriage of your child. The name of this document will vary depending on your state and is usually effective for six months to a year, subject to state law. Because this document is only effective for a certain period of time, it is important that you touch base with us to have new documents prepared so that your child is always protected.

We Are Here to Protect You and Your Children

Being a parent is a full-time job. We want to make sure that regardless of what life throws at you, you and your child are cared for. Give us a call to learn more about how we can ensure that the right people are making decisions for your child when you cannot.

What is Probate?

Understanding Probate, Wills, and Estates

Estates, wills, and probate are distinct, yet interrelated, estate planning concepts.

• An estate consists of everything that a person owns—including their personal possessions, real estate, financial accounts, and insurance policies. Virtually everyone leaves an estate when they die.
• A will is the legally valid written instructions that a person creates describing how they want their money and property distributed upon their death. Wills are highly recommended, but there is no legal requirement to have one. To make a will legally valid, it must be properly executed in accordance with state law. Executing a will involves signing the document in front of witnesses. Additionally, at the time of signing, the creator must have capacity (i.e., be of sound mind).
• Probate is the legal process that formally distributes the accounts and property that are in the decedent's sole name, do not have a beneficiary designated, and have not been placed into a living trust prior to the decedent's death (sometimes referred to as probate assets). During probate, a decedent's probate assets are identified and gathered, their debts are paid, and the probate assets are distributed to beneficiaries named in the will or their heirs as determined by state statute if there was no will.

Probate with a Will

Assuming that a decedent does have a will, here is how probate typically proceeds:

• The person nominated in the will to act as executor (sometimes called the personal representative) files a copy of the death certificate, the original will, and any required documents or pleadings with the probate court. If the person nominated in the will does not file these documents with the court, state statute will determine who else has priority to make such filings (possibly another family member, an attorney, or even a creditor of the decedent).
• The court examines the will and other documents filed to confirm their validity and gives the named executor the legal authority to carry out the decedent's wishes, as specified in their will. This legal authority is conferred in a court-issued document called letters of authority, letters testamentary, letters of administration, or another similar name.
• The individual appointed as executor inventories and values the decedent's estate assets and identifies any outstanding debts of the estate, such as loans and credit card debt.
• Once estate debts are paid, the remaining accounts and property are distributed to named beneficiaries and the estate is closed, ending the probate process.

The length of a probate can vary depending on many factors, including the size of the estate, state laws, and whether the will is deemed invalid or contested.

Avoiding Probate

In some cases, avoiding probate altogether can cut down on the amount of time it takes to wind up a deceased person's affairs. There are also other reasons to avoid probate, such as keeping probate filings out of the public record and saving money on court costs and filing fees.

Beneficiary designations, joint ownership, trusts, and affidavits are common ways to avoid probate, but only if they are done correctly. Here are some examples of these probate-avoidance tools in action:

• Pensions, retirement accounts like 401(k)s, and other accounts that allow for designated beneficiaries may not need to be probated. Transfer-on-death (TOD) and payable-on-death (POD) accounts are generally treated the same as accounts that have a beneficiary designation. However, you should never name a person who receives Medicaid or SSI, or a minor child, as a beneficiary or TOD/POD designee.
• Accounts and property that are jointly owned and have a right of survivorship can bypass probate.
• Accounts or property held in a trust may also bypass probate. But trusts are not without administrative and cost burdens. Also, if the deceased forgot to transfer ownership of an account or piece of property to the trust, a pour-over will may be needed to transfer those accounts and property to the trust through the probate process upon the trustmaker's death.
• Some states have laws that allow probate to be skipped if the value of an estate is below a specified value and does not contain any real estate (often referred to as a small-estate exception). The threshold value for qualifying for this exception varies by state. For example, probate can be skipped in Arizona, Texas, and Florida for estates worth less than $75,000. In California, the threshold is $184,500; in New York, it is $30,000.

Filing a Will versus Opening Probate

Filing a will with the probate court and opening probate are separate actions. A will can be filed whether or not probate is needed. Remember that probate is needed only under certain circumstances, such as when the decedent passed away while owning probate assets. Further, not only can a will be filed with the court when a probate is not needed, some state laws actually require it. Some state laws require the person who has possession of a decedent's will to file it with the court within a reasonable time or a specified time after the date of the decedent's death. The consequences for failing to file a will vary by state but may include being held in contempt of court or payment of fines. Additionally, the person in possession of a will might also be subject to litigation by heirs who stand to benefit from the estate under the terms of the will. The latter also applies if the will-holder files a will but does not file for probate. Failing to file for probate (when probate is necessary) prevents inheritances from being properly distributed.

These legal consequences are usually imposed only on a will-holder who willfully refuses to file a will. If someone you love has passed away and you have their will in your possession, we recommend that you work with an experienced probate attorney who can assist you in determining whether a probate must be opened and whether the will needs to be filed.

Avoid Probate Issues When Drafting a Will

Probate avoidance may be one of your goals when creating an estate plan. You should also consider implementing tools in your estate plan to minimize issues that may arise if your estate does require probate.

Your will may have been written years ago and might not reflect current circumstances. You could have acquired significant new accounts or property, experienced a birth or death in the family, left instructions that are vague or generic, or chosen an executor who is no longer fit to serve. An outdated or unclear will can spell trouble when it is time to probate your estate, making it important to identify—and address—issues that could lead to problems, including will contests and disputes.

It is recommended that you update and review your estate plan every three to five years or whenever there is a significant life change or a change in federal or state law. You cannot be too careful when stating your final wishes. For help drafting an airtight will that avoids possible complications, please contact us.