Keeping the Family Cottage – In the Family

Keep-Family-Cottage

Your home in the Outer Banks is a special place. Likely, you hope that your children will always appreciate and enjoy the property just as much as you do. Don’t let the potential awkwardness of discussing future ownership detract from your home’s original purpose: bringing family together to create good memories.

While no magazine article can take the place of personalized counsel from estate, legal, and financial planning professionals, what is outlined here are a few concepts and concerns that are unique to owners of vacation properties.

In the Tar Heel state, whether your Outer Banks property is your sole residence or your vacation property, it is considered “real property.” Real property is left to those you designate as beneficiaries in your will – or if you die without a will, all of your property will be decided by North Carolina law. One word about dying without a will (also known as “intestate”): if yours is a larger estate, division of property without the benefit of a will falls under the Intestate Succession Act and often results in a hefty federal tax bill.

But when is even the most detailed last will and testament still not enough?

Let’s say that you have three grown children and a vacation home in Corolla with a market value of $1,500,000. You may be idealistic enough to hope that the three siblings will maintain and enjoy the home long after you are gone. However, let’s say one child lives on the west coast and has very little chance to use the home. Or what if all three want to use the property equally but one child cannot afford the insurance, maintenance and taxes that come with a home on the coast? Do the other siblings propose a buyout? At what cost?

In a simple world, Sibling A and Sibling B join forces to buy out Sibling C. A and B give C $500,000 who in turn signs off on a deed granting his interest in the property to Siblings A and B. In a perfect world, siblings A and B would still invite sibling C to future family gatherings and allow for some personal use of the family asset. But this is not a simple nor perfect world. What if Siblings A and B just don’t have the money to buy out Sibling C? What if they cannot agree on a price? To further complicate matters, there are different ways of holding title. When multiple people inherit a home, they typically become “tenants in common,” which is sometimes jokingly altered to “trouble is coming.”

It’s time to consider estate planning or different ownership structures.

Perhaps your heirs are of modest means and you believe that they would prefer to inherit the wherewithal to pay debts or put their children – your grandchildren – through college. Your heirs might be unable to afford the yearly property taxes and related maintenance costs.

The best course may be to leave a family member other assets instead of a share of property. Or it may be best to instruct that the house be sold and the proceeds divided evenly if the joint ownership is sure to cause strife or if the home might not carry the same joy for future generations as you would have hoped it would.

More Options…
Suppose you own a cottage in Nags Head and your intention is to leave that home to your two daughters who are both married. You know that they will want to entertain on the wraparound deck, sip wine, and enjoy those spectacular sunsets on the sound – just as much as you do. Consider what happens, though, if one of the daughters gets a divorce or passes away – because the remaining sibling could wind up owning your property with a former in-law (not to mention possible remarriages and step-children). Particularly if yours is a blended family with sets of children from previous marriages involved, you should take the time to speak with all of your family members.

An Ongoing Legal Battle …
In 2008, a home in South Nags Head was to be divided equally by four children as directed in a parent’s will. One sibling was a natural-born child of the deceased; the other three were step-children. Now, six years later, the estate still sits in probate. Initially, the home provided a source of rental income while the siblings argued, but a storm flooded the home a couple of years ago. When they could not agree on how to fix the flood damage, the tenant moved out. The home now sits vacant and uninhabitable.

LLCs…Not Just for Corporations Any More…
Even in the most harmonious families, it is difficult to predict how siblings will relate to one another when settling inheritance disputes. And, granted, some potential heirs are more suited to inherit a portion of a vacation home and others are more clearly in need of the cash value of their share. (Some are not suited to inherit any of your estate, but that’s a different article altogether.)

Instead of leaving each of your children a direct interest in your cottage through your will, a Limited Liability Corporations (LLC) can be drafted by an attorney before you pass away. An LLC is a business entity with membership interests that can be transferred to your heirs. As a result, their rights and obligations (and those of future owners) are governed by the LLC operating agreement which can cover everything from scheduling the use or rental of the house to how maintenance, insurance, and tax expenses are to be paid. An LLC offers the added bonus of shielding the homeowners from injury or creditor lawsuits. It keeps the property in the family and provides a structure for ownership and governance issues that will stay in place. An LLC allows one or more siblings to exit gracefully from joint ownership while at the same time, preventing a forced sale and stipulating fair buyout price guidelines.

Your attorney will draw up the LLC with input from you. Your initial plan and outline do not have to be perfect, and you can change it as circumstances change. The key advantage of planning ahead is having the time to consider all the financial and emotional fallout before it happens.

Whether you live in it, rent it out – or a combination of the two – a beach property often represents a substantial part of an owner’s estate. You don’t have to be Kennedy-rich to want to preserve a vacation home for the use of your heirs. So, sit down with your loved ones and have a candid conversation about the future – yours and theirs. Then, reach out for professional advice.

Ensure that after you’re gone, your OBX property isn’t lost to family squabbles, competing priorities, or taxes. ♦

Lillian Stevens lives in Williamsburg where she works as the Freedom of Information Act Officer for the College of William & Mary. She is also a liaison staff writer for the William & Mary News and Ideation magazine. Lillian spends a good portion of every summer on the Outer Banks – her favorite place in the world.

Taxes, Trusts, and LLCs:

A Summary
With proper planning, you and your spouse may be able to minimize the federal tax liability passed to your children or other heirs – while ensuring that your wishes are being honored.

Taxes:
There is no inheritance and estate tax collected in North Carolina since the NC legislature repealed that tax in July 2013. Federal estate taxes, however, are another beast. In terms of minimizing federal taxes, if the combined value of all property owned by an individual exceeds $5.34 million, there will likely be federal estate tax owed after death. If, however, property is owned jointly by a married couple and certain legal steps are followed, after the first spouse dies, the survivor may leave more than $10.6 million before the estate owes federal taxes. Those dollar figures are only accurate for this year and are adjusted annually. irs.gov

Trusts:
Please note that there are many kinds of trusts. Speak with an attorney or estate planner who can offer guidance on whether a revocable or irrevocable trust is best suited for the size of your estate and the age of your heirs.

Below are some key features of trusts:
• Trusts are commonly created with heirs who are still minors as they allow the parent to appoint an adult trustee to manage the property.
• The trustee who is appointed to manage the property may be a non-family member.
• Requisite fees (for management, maintenance, taxes, and repairs) are typically paid out from the trust.
• The trustee may determine that the property can be rented out to generate income if the trust is having trouble paying for fees described above.
• Some trusts can remove the house from a taxable estate and will allow for continued use of the home by the original homeowner.

Limited Liability Companies (LLC)

Below are some key features of LLCs:
• An LLC is a business entity similar to a corporation; property is sold or gifted to the LLC and membership interests in the LLC are transferred to heirs.
• LLCs also offer personal liability protection from injuries or accidents that take place at the home or from creditors.
• In North Carolina, setting up an LLC requires filing Articles of Organization with the NC Secretary of State, paying a filing fee, and drafting the appropriate operating agreement.
• No company corporate kit or membership certificates are required in NC; however, there is a $200 annual fee with the state to keep the LLC in place.
• A separate tax return under a taxpayer I.D. must be filed with IRS and NC Department of Revenue, including a K-1 form to show profit and losses to the LLC members.
• LLCs can prevent forced sales after the death of the original homeowner but also allow for graceful exists for beneficiaries.

NOTE* The information contained in this article is not intended to constitute legal or financial advice and should not be relied upon in lieu of consultation with the appropriately licensed professionals.

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