Passing a Legacy Property to the Next Generation

Written By: Kevin Reardon, CFP®

We have many clients who own second homes, including cottages ‘up north’, homes in warm weather states or in the mountains, hunting land, and more. As the primary purpose of the second home is to offer the family a place to relax and be together, these homes create emotional bonds between the family and the property. These emotional ties lead each generation to want to keep the home in the family for decades to come. Passing a legacy property between multiple generations can be tricky and there are several steps a family can take to ensure a property stays happily in the family.

Note: For purposes of this article, we’ll reference the first generation as G1, the second generation as G2, and so on. 

Estate Documents and LLCs

G1 will want to clearly state within your Will and/or Revocable Trust who will inherit the property, alleviating family conflict on your death. Frequently clients will set up an LLC to own the property, as this can make it easier for future generations to manage it.

Operating Agreement

You will want to have an operating agreement that defines the roles, responsibilities and decision making for G2 and beyond. In addition, this document should include conflict resolution mechanisms, as even agreeable families run into disagreements. It will also anticipate and define what happens when family members want to exit the partnership, including what happens if a G2 or G3 member dies. This document becomes the ‘playbook’ for how the family will make decisions, and even allows them to amend the document if enough members agree.

Maintenance Plan

Having a pre-defined maintenance plan, with checklists of upkeep items and improvements will ensure the property stays in good working condition. This is especially important as management duties may rotate between family members each year.

Funding Plan

One of the major stress points of keeping a legacy property in the family is the money needed to pay for property taxes, insurance, maintenance and repairs. It’s likely that the inheriting G2 and G3 will have different financial circumstances, so providing dollars to maintain the property can alleviate this issue. G1 can fund a ‘Cabin Trust Account’ with a specific amount of assets allocated at their death via their estate plan, or utilizing life insurance proceeds.

In some instances, families may require a usage fee or annual maintenance fee so future generations have ‘skin in the game’, just as Mom and Dad did when they owned the property. Relative to the maintenance plan above, consider family members who contribute sweat equity to maintain or improve the property.

Lottery and Calendar

A source of tension with any legacy property deals with when family members can use the property. Having a well-defined lottery system is a great solution, where each member of the family gets to choose specific days or weeks they can use the property. Each year, the lottery system rotates so each member has a chance to pick their most desired dates. Keep in mind the most sought-after days revolve around holidays, and many families create special usage rules for these days. Google Calendar is a great tool many families use to keep track of usage. Google Documents can be used to share information and store important documents related to the maintenance of the property.

The Operating Agreement should also include rules for who uses the property. Is there a minimum age needed for a family member to use the property? Are family members allowed to bring guests?

Discussion and Stress Test

Ideally, a legacy plan is implemented when G1 is alive, so they can coach the next generation, serve to mediate conflicts, and make needed changes to their Will or Operating Agreement. Coaching the next generation should not be overlooked, as G2 or G3 may not like a specific rule and it helps to be able to talk directly with G1 to understand the spirit of what they are trying to accomplish.

Having a legacy property can be an incredible asset for a family, one whose benefit and value goes beyond financial considerations. The sooner you implement the process, the greater the probability of success. Reach out to your Shakespeare advisor for additional considerations and resources.