Family vacation homes are more than just tangible assets with money value. They have strong emotional value. They’re places where families build and strengthen their ties around shared joys. They’re supposed to be places that offer a serene respite from daily conflicts.
So the desire of elders to transfer these homes to their children and keep them in the family is understandable. But there are inherent problems when one elder owner wants to transfer a house to what are likely multiple younger co-owners in the junior generation. And these assets then become petri dishes of conflict.
Sources Of Conflict
The unique nature of the cottage as a jointly owned, sentimental family heirloom makes it a very different financial asset. Cottages are costly, for one thing, and children might eventually face creditors (including divorcing spouses). Sibling rivalries are also magnified when it’s time for planning a house transfer. Given the increasing costs of maintenance, repairs and property taxes, vacation homes can agitate and inflame resentments among children who have different amounts of wealth and resources to keep the cottage up.
To ensure peace, the hard work of cottage succession planning must begin before the conflicts do. A successful transfer plan must address the following:
• Who is allowed to use the home? And does that group of users, for example, include adult stepchildren of a divorced spouse? Does it include college friends or close neighborhood friends of minor children?
• Who pays for what? Taxes? Insurance? Maintenance? Improvements or major repairs (such as a new roof)? Other expenses?
• Who chooses and maintains the furnishings and other matters of interior decoration? Who pays for any aesthetic updating unrelated to wear and tear?
• What are the standards of conduct for guests? Are pets allowed? Is smoking?
• How do you determine who gets the prime weeks of the year to use the cottage?
Aside from property management issues, families inheriting cottages are entering a new co-ownership with multiple people. And it’s likely that at least one co-owner will have problems. Such co-owners might simply not want to own property, for financial reasons or otherwise. They may be unable to afford to pay cottage expenses. Or maybe they need money and resent having their inheritance trapped in a piece of property.
If the original planning does not anticipate the economic realities of such inheritors, the parents’ wishes may end up being thwarted, as many joint ownership court decisions demonstrate.
The Form Of Ownership Matters
The usual plan when a widowed spouse leaves a jointly owned family cottage to the kids is to “give” it to them equally. And this is exactly how the problems begin: If the surviving spouse gifts or bequeaths a cottage to multiple children or other beneficiaries, either when she’s still alive or after she dies, the recipients will probably acquire joint ownership of the property as tenants in common unless she designates otherwise.
A tenancy in common is a type of shared ownership of property, where each co-tenant (or co-owner) owns a share—typically, but not necessarily, equal—of the entire property. There are no rights of survivorship in these situations, so if a co-tenant dies, her interest passes according to her will or applicable state laws of intestacy, if she did not have a valid will.
All co-tenants have the right to occupy the property in these cases, regardless of the size of their individual ownership stakes. As tenants in common, each has the right to freely sell, pledge or otherwise dispose of her interest in the cottage to whomever she chooses, for whatever reason she has, without consent from any other co-tenants, either while she’s alive or after she dies. Each co-tenant’s interest in the cottage may be subject to creditors’ claims, divorce claims or even court-ordered partition by one or more disgruntled co-tenants who want to “cash out.” This could lead to a compulsory sale of the cottage. In fact, a court-ordered partition sale can occur even if the remaining co-tenants do not want to sell. It’s not uncommon for a disgruntled or cash-strapped co-tenant to sell her interest to a real estate developer who subsequently files a partition action to force a sale and acquire the entire property for a price below its fair market value.
In short, a tenancy in common by itself is more likely to lead to family conflict than to family harmony. This is surely not a desirable outcome.
Fortunately, there is a succession planning solution that is customizable, flexible and workable, and it can be specifically designed to ensure that the family cottage remains in the family.