Estate Planning for a Vacation Home

If you are fortunate enough to own a vacation home, you need to figure out what will happen to it after you are gone. Many people in this situation hope to keep vacation homes in the family. Guaranteeing that can be tricky, though.

Meant to be fun and relaxing places to get away from everyday life, vacation houses can cause problems between, for instance, siblings after their parents pass away. Some siblings may want to use the house, while others may need cash and want to sell. There may also be disputes over who pays maintenance costs or when different families can use the house.

Estate planning can help to ensure that your property is handled according to your wishes and doesn’t become a source of conflict or financial burden for your heirs. Here are key considerations and strategies for including a vacation home in your estate plan.

How Many Families Have a Second Home?

Having more than one home is traditionally associated with the wealthy, and there’s some truth to this. A 2023 survey of financial advisors who work with high-net-worth clients estimated that about two out of three own second homes. One-third of those who don’t have a second home say they’re interested in buying one.

Second homes aren’t just for the wealthy, however. Another survey from 2023 found that 40 percent of Americans own a vacation home. About three in four of the remaining 60 percent said they’re looking to buy a second home.

Overall, the number of second homes owned in the United States is about 6.5 million, or around 5 percent of the total housing stock. The most second homes are owned in Florida (15 percent) and the fewest are owned in Wyoming. Around half of the nation’s second homes are in eight states: Arizona, California, Florida, Michigan, New York, North Carolina, Pennsylvania, and Texas.

Depending on where a vacation home is located, it can be relatively affordable. Many Americans say they paid less than $200,000 for a second home, but a second home is generally more expensive than a primary residence.

In 2023, the typical second home was worth $475,000 versus $375,000 for a primary home, according to Redfin, which also reports that the share of mortgages that went to second homes dropped to 2.8 percent in 2023 — down from 3.6 percent in 2022 and 5.1 percent in 2021.

This reduction in second home mortgages is likely due to a surge in vacation homes purchases during the pandemic that has since cooled as a result of rising interest rates, fewer people working from home, and reduced inventory.

While the total rate of second home ownership is not starkly different between wealthy and nonwealthy Americans, the reasons why people purchase second homes can vary by net worth.

Wealthy Americans tend to own second homes primarily as getaways. Many also plan to move to their second home full time when they retire.

Non-high-net-worth buyers may be more interested in buying a second home that functions as both a family getaway spot and an income stream.

The short-term rental market generated around $64 billion in revenue in 2023. Average daily rates were approximately $300, producing just over $26,000 annually for 785,000 hosts.

Even if you didn’t purchase a second home for investment purposes and want to keep it as a vacation residence rather than as a source of rental income, it’s probably earning money for you.

Housing is where most Americans store their wealth, and it is a primary driver behind increases in individual net worth. From 2013 to 2023, the value of the U.S. residential real estate market rose by $19 trillion.

Valued at an estimated $43.5 trillion, the U.S residential real estate market is worth more than the market cap of the S&P 500 ($36.7 trillion) and the total value of all U.S. public companies ($40 trillion).

Questions to Ask as You Plan to Pass Down a Vacation Home

Because a second home is often a store of not only monetary value, but also sentimental value, it can be a particularly complicated asset to create a succession plan for.

You may want the home to remain a family gathering spot for future generations. If so, it’s important to incorporate it into your estate plan now while you still have full control. When thinking about your vacation home estate planning options, the following considerations can help to inform your decisions:

• How much time are you spending at the property? This can influence whether you decide to transfer ownership now or after your death.
• Are your heirs ready to take on the responsibility? While your children, grandchildren, or other heirs may have homes of their own and understand the costs — including the many “hidden” costs, like taxes, insurance, HOA fees, and maintenance that come with home ownership — you should ask whether they’re ready to take on the added responsibility of a second home.
• How well does your family get along? Even if your heirs have good relationships and similar financial situations, conflicts might still emerge over cost sharing and who gets to use the property—and when. The larger the number of heirs and family lines that have a stake, the greater the potential for disagreements and conflicts.
• Do you want to set any restrictions? Consider whether you’d like the home to be rented out, if family members should be able to sell their interest outside the family, or if you want to impose conditions for one heir buying out another’s share. Establishing rules now can avoid future issues that might lead to family disharmony.
• Who has genuine interest in the property? All, some, or none of your surviving loved ones may have a strong desire to keep the vacation home. Talking with them now and figuring out their preferences will help determine how you plan for the future of your second home.
• Is there an existing mortgage on the property? In this case, approval from the lender might be necessary before any transfer takes place.

Ways to Pass Down a Vacation Home

A residence is among the most valuable assets that most people own. A second home is often worth more than a primary home and deserves significant forethought in an estate plan.

Once you have discussed potential succession issues with your loved ones and your attorney, you can turn your attention to a specific strategy for handing down a vacation home to the next generation.

Leave it to Them in Your Will

One option for passing on a vacation home is to leave it to your heirs in your will. The problem with this is that if several heirs own the house equally as joint tenants or tenants in common and one wants to sell, that heir can demand to be bought out. If the others can’t come up with the money to buy them out, the person who wants out can force the sale of the home.

An estate plan can avoid this outcome by including a buyout option for any heirs who decide they do not want to own the property. The buyout price can be less than if the property is sold to a third party and payment terms can extend over several years.

Place the Home in an LLC

Instead of giving the property to your heirs outright, you can put it in a Limited Liability Company (LLC).

LLCs have become a popular estate planning tool for vacation homes. Using an LLC allows parents to transfer interest in the LLC to their children while still retaining control.

Parents can use the annual gift tax exclusion to slowly gift their children additional interest in the LLC each year. The LLC agreement can designate a property manager, provide instructions on maintenance costs and property taxes, and include buyout options. Property in an LLC is also protected from creditors.

Use a QPRT or Other Trust

Another option is to put property into a qualified personal residence trust (QPRT), a type of irrevocable trust. A QPRT allows you to live in the home for a certain number of years and at the end of the term, your children or other designated beneficiaries own the home.

The main purpose of a QPRT is to reduce taxes on property, but QPRTs are complex and must be set up just right or tax savings will be negated.

Other types of trusts, such as a revocable living trust or a charitable remainder trust, can be used to hold and transfer a vacation home as well.

A living trust, for example, can offer the original homeowner significant control, allowing them to set specific guidelines for the property’s use and upkeep. Funds can be allocated within the trust to cover ongoing costs, and the home can remain part of the estate until death, at which point it converts to an irrevocable trust and is removed from the estate, potentially lowering taxes.

Other Points to Keep in Mind

Additional considerations and strategies for passing down a family vacation home include:

• Creating a life estate, which lets your transfer ownership while still retaining the right to use the home throughout your lifetime.
• Establishing a Family Limited Partnership (FLP) to hold the property. FLPs let family members buy shares and become partners. They can be used to own a vacation home and provide tax benefits, creditor protection, and additional benefits.
• Planning should account for taxes, including federal gift, estate, and generation-skipping transfer taxes, as well as income and capital gains taxes, state estate and inheritance taxes, and state and local property taxes.
• Vacation homes located abroad present additional estate planning complexities.
• If some heirs aren’t interested in the property, your estate plan may need adjustments to ensure fair distribution of assets among all beneficiaries.

To determine the best way to protect your vacation home, consult with a local estate planning attorney.