Most business owners recognize the importance of a well thought out and implemented business succession plan. Sadly, recognizing the importance of a succession plan and actually developing and implementing one is a different matter. A 2015 survey by CNBC and the Financial Planning Association found nearly 80% of business owners plan on selling their business to help finance their retirement, but less than 30% had taken the steps necessary to develop a written and formalized succession plan.

These statistics are troubling but not surprising when you consider our propensity for procrastination. Most advisors say that they have spoken with their clients about the importance of a succession plan for their business. In light of the statistics cited above, we in the financial advisory/Wealth Management business, as a group, are clearly doing a poor job getting our clients to focus on and actually implement a comprehensive succession plan. Delaying this most important aspect of your planning could result in your inability to achieve your retirement objectives, or your inability to pass on your legacy in the manner which you desire.

Plan or Perish.

The same issues that confront business owners apply to those of you fortunate enough to have acquired a special family home. Whether it’s a vacation home down on the beach, a mountainside retreat at your family’s favorite ski area, or a cabin on their favorite lake, the special property is just that: special. This special property, which we like to refer to as an “Heirloom Property,” is where some of the family’s best memories were made.

These properties need a plan of their own to ensure they will remain within the family and continue to be a source of joy and connectivity. Unfortunately, due to lack of planning these properties often turn into a source of family stress, conflict and fracture (precisely the opposite of what you, as the owner, envisioned when you acquired the home). Why is this?

Like the propensity to procrastinate on business succession plan outlined above, owners of these properties similarly like to procrastinate. Some common refrains that we hear include the following: “We will get to it later” or (my personal favorite) “The kids will figure it out.” Well, we have seen time and time again that this sort of wait and see mentality rarely leads to the desired result.

The “Equal Shares” Mythology.

One classic default planning tactic that we frequently see clients and their advisors and attorneys make is when they mistakenly treat the Heirloom Property as they would any other asset and simply push the property ownership through their estate to the surviving children in equal shares. This fractional share strategy will almost certainly lead to trouble. Treating the home, which by its very nature is illiquid and unique, like an investment account that can be easily divided into shares for the children to do with as they wish is a huge mistake. Without a formal structure in place, the children will undoubtedly run into governance issues which may start out small and could rapidly escalate into big, “I am never going to talk to you again” type problems.

It doesn’t have to be this way. With proper planning and a formalized structure in place, the family can inherit the home and have a governance structure in place (a “roadmap” if you will) that will help them deal with the tricky business of owning property together. Through the use of what Boston area attorney Timothy Borchers calls an Heirloom Ownership Trust (or a HOT Trust), the property owners and beneficiaries can rest easy knowing that the major areas of conflict have been thought of, addressed and planned for. The HOT Trust is a vehicle that helps ensure that the property is governed wisely and remains within the family. The Trust and coordinating agreements or covenants will contain what he calls AUGUST Terms. The acronym AUGUST stands for the provisions that are essential to keep the home in the family:

Allocation of ownership
Understanding of purpose
Governance
Use
Stewardship, and
Transfer

Other practitioners like to use a Limited Liability Company (LLC) for this sort of planning. Determining the best structure for you and your family depends upon your personal facts and circumstances.

Financial Freedom for the Heirs.

Inheriting an Heirloom Property can actually be financially devastating for the family in the absence of thoughtful coordination of family finances. Whether you chose to utilize a HOT Trust with AUGUST Terms or an LLC, you will need to pay close attention to important financial considerations. We call this coordination of estate and financial planning centered on the special family vacation home, “Second Home Savvy.”

Heirloom Properties are generally expensive to maintain and care for. The costs of maintenance, management, repairs and improvements, taxes and insurance often add up to a significant sum of money. Then when you consider that the objective is to keep the home in the family for an extended time period, those figures grow exponentially.

Setting aside a separate pool of assets through your estate plan is one way to deal with this issue. Oftentimes families choose to acquire a survivorship life insurance policy to create an endowment or to contribute over time to a sinking fund to ensure that the property has the funds necessary to be self-supportive going forward. The embedded leverage that is a prime advantage of life insurance makes it one of the preferred components of this sort of planning. Just as partners in business insure each other’s lives for continuity, so savvy Heirloom Property owners do the same.

Like a business that is intended to survive, your vacation home needs a succession plan. Without a succession plan, your vacation home will likely not survive more than a few years after an owner’s death. Don’t continue to put off what you know you need to do – get a plan in place for your vacation home and prevent the family drama that is lurking around the corner.

If you have any questions about your heirloom property, please reach out to Chris Cahill at 978-318-9504 or via email at: Chris@TwelvePointsWealth.com to schedule an initial conversation.