The One Asset You Can’t Divide Equally
Most financial assets are easily distributed to heirs upon death. Stocks, bonds, cash, and IRAs can all be divided into equal units — allowing each heir to decide what he/she wants to do with the inheritance (keep, liquidate, etc.) Artwork, automobiles, jewelry and collectibles can also be valued and distributed equally. Even a primary residence usually falls into the easily divided category. In most cases the home is sold and the proceeds divided among the heirs. If the house is left to a specific heir, other beneficiaries can receive other assets of equal value. It’s rare that a primary residence is owned jointly by two or more heirs. Likewise, a family business will most often be given to one or two children involved in the business, rarely to all of the children. Offsetting gifts can then be distributed to the other heirs.
Vacation homes, however, are a whole different matter. As a place of happy family memories, a second home is often viewed as an “heirloom” passed on from generation to generation. The owners want to know that the home will be enjoyed by their children and grandchildren long after their death. The tricky part is that the owner’s wish to keep the home in the family can create many unforeseen problems and complications — and even harsh acrimony between siblings. For example, some heirs might:
- not love the house as much as others
- not be able to afford upkeep, property taxes, etc.
- live too far away to enjoy the home
- prefer to have the cash value to put to other uses (home purchase, college ed)
- have their own vacation home
In addition, longstanding family rivalries and slights (real or perceived) often surface and cause dissension and stress, usually over money and control. In the worst case scenario, none of the heirs might get to enjoy the property. That’s because any co-owner of a property can force its sale — usually resulting in below-market prices and permanent family discord.
The most common issue with bequeathing a second home is the belief that the “kids will work out these issues themselves.” That’s rarely the case. The good news is that a little forethought and planning can ensure the owner’s wishes are achieved and the family stays happily intact. Here are some steps to achieve that goal:
- Speak privately with each of the adult heirs to learn their expectations, desires and concerns
- Determine whether the heirs (some or all) have sufficient resources to pay the ongoing expenses of the property (annual taxes, maintenance, and repairs)? A necessary course of action may be developing a plan to provide for this future need either by earmarking specific assets for this purpose. In many cases, life insurance is the best choice for this purpose. A properly designed and funded policy can be a tax-efficient and cost-effective way to ensure that the vacation home remains in the family. Failing to provide for the financial management of the property is the leading reason heirs are forced to sell the property.
- Decide if arrangements should be made to pay inheritance taxes.
- Identify and address any unresolved emotional issues regarding the property (e.g., second marriages, stepchildren, or disabled heirs).
- If there are substantial age differences between the various heirs, consider whether special planning must be done to protect the interests of the younger heirs
The most important thing is to write it all down in language that is unmistakable. This written plan is a once-in-a-lifetime opportunity for the owners to visualize their legacy and minimize family conflict. This “AUGUST” mnemonic will help ensure that you address the key issues:
- Allocation of ownership
- Understanding of purpose
- Use of the property
- Stewardship (money set aside for maintenance, etc.)
- Transfer restrictions on whom the property can be left to
Every situation is unique and there are a wide variety of trust and insurance options to ensure that the owner’s wishes are achieved. While trusts and life insurance are often perceived as complicated tools, your wealth advisor can explain the various options and simplify the process. And like most financial decisions, the earlier you begin the better.