Gifting vacation and legacy properties to your children

In a recent Wall Street Journal Wealth Management interview, a patriarch of a wealthy family discussed a plan he undertook to pass a prized family vacation
property to his children and descendants, in a manner that would ensure preservation of the legacy, the family’s value, the right of descendants to use the property in the future, and in a manner that avoids conflict.

The client had a unique perspective on the matter. Not only did he have extensive experience helping clients deal with legacy properties, his wife’s family had faced a similar situation a few years before.

These were the steps that he follows:

First, instead of dividing ownership among the children, he created a trust to hold the title of the property.

Second, he created an endowment to pay for the upkeep of the property, which was funded by a sufficient fund to ensure proper care for the property in the foreseeable future.

Third, he created a limited liability company to hold the endowment inside the trust, which avoids custodial fees to the trust because it technically does not hold any money.

Fourth, he prepared an operating agreement for the LLC which specified that the title of the property and the endowment would pass into the trust upon the client’s death. The operating agreement also set rules for use of the property to help avert potential conflict among the client’s children: Rather than giving the children equity shares in the property, the operating agreement gave each child the right to equal access to it.  By granting his children shares that had no economic value, he prevented them from cashing out their share in the property and jeopardizing its use by future generations.  Under the agreement, the heirs will elect a sibling of family member as property manager.  The manager will make all administrative decisions, including arranging for maintenance and repairs and coordinating the family’s use of the property. Anyone interested in using the home will submit a formal request to the manager, who can grant it in the order it was received, with each sibling going to the bottom of the list after that person’s turn in the house was over.  Thus, the structure of the operating agreement ensure equitable shared use.  Typical with legacy properties, each owner must pay an annual fee to cover maintenance, taxes and insurance, as well as sometimes paying for the use of the property.   While that fee structure can cause discontent if some of the heirs have the desire to use the property, but not the financial wherewithal to do so, it is generally regarded as the most equitable approach to shared use.

This type of planning is typical of the type of work we do here at DRC.  While the “science” of “family cabins” and “family legacy property” has been developed well over the last decade, at DRC we strive to take the values of our clients and embed those values in the planning we accomplish for our clients.  Each family is different and has unique goals, so each family needs an attorney and an advisor who has experience with wealthy families and an ability to translate each family’s goal into a sustainable long-term plan.