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Oct 2011
31
October 31, 2011

Managing Vacation Homes . . . So They Don't Manage You!


Vacation home planning received a shot in the arm this year thanks to Klooster v City of Charlevoix. Planning opportunities to transfer property into joint name with others without uncapping property taxes are available that had not been available previously (see “Keeping the Cap on Property Taxes Through Joint Tenancy,” Estate Planning Focus, Spring 2011). But perhaps as importantly, Klooster has heightened awareness of the importance of advanced planning for a vacation home. Not only can taxes be avoided with proper planning, but also family harmony can be preserved if key decisions about how the property will be managed are decided in advance of a transfer event.

Under Klooster, property owners can add another individual as a joint owner with rights of survivorship without uncapping property taxes. In most situations, the death of the original owners also will not result in uncapping. This allows property to be transferred to the next generation without uncapping property taxes. Maintaining the taxable value of the property and keeping property taxes at current levels can be critically important to maintaining the affordability of the property for future generations.

However, despite the many planning opportunities that Klooster opens, joint ownership has several drawbacks:
 
  • First, Klooster only addressed adding one individual as joint owner, leaving open the question of whether multiple persons can be added as joint owners and avoid uncapping.
  • Further, careful planning must be undertaken if you desire to have the property continue to be owned by all lines of the family rather than the “last man standing.”
  • Finally, the property will be taxable in your estate at your death if you remain a joint owner, which is an essential element of Klooster.

Other ownership options include using a trust or limited liability company (LLC). While uncapping of property taxes may occur with these forms of ownership, they allow you to gift the property during your lifetime and avoid taxation of the property in your estate at your death. Further, the trust and LLC can provide for centralized management of the property by fewer than all owners, which can be an invaluable tool especially if there will be many owners. Finally, if you want to create a fund to assist with ongoing expenses of the property, the trust and LLC are excellent vehicles to manage the cash gift and ensure the funds will be available to pay those expenses.

Property ownership in any form involves attention and diligence. Decisions concerning property become amplified when the property is owned by multiple people. Having a written agreement addressing management issues can provide certainty, understanding and trust among the owners, allowing the property to be a place of enjoyment rather than a source of friction. A management agreement should address at a minimum issues such as:
 
  • how use of the property will be allocated among the owners;
  • how expenses will be shared among the owners;
  • penalties for those who don’t pay their share of expenses;
  • who will be responsible for paying the bills and arranging for repairs when needed; and
  • the exit strategy for those who no longer desire or no longer can afford to be an owner.

Whether joint ownership, a trust or LLC is the best form of ownership for you will depend on your facts and circumstances, your goal, and whether avoidance of property taxes or estate taxes is of priority. Regardless of the form of ownership selected, a written agreement outlining the rules, benefits and responsibilities of ownership is essential.

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