Their differing lifestyles, needs, plans—even tastes in décor—are a few reasons why careful estate planning is important.
Molly’s parents had a vacation home on Lake Michigan that they purchased when they were young. This is the house where Molly, an only child, spent her summers growing up. She brought her future husband there to meet her parents. And it’s where she and her husband would spend many happy vacations with their four children.
Eventually, Molly inherited the house, and later, she and her husband retired there. Their adult children, all living in the Chicago area, visited often, bringing boyfriends, girlfriends and, eventually, spouses and their own children.
Molly and her husband loved this home and saw it as the family’s gathering place. So as part of their estate planning, they were very careful that their wills left the house to their four children equally and outright.
They understood the importance of estate planning, but in hindsight, their approach to gifting the house could have been much better.
Consider these changes that affected the family and the property: One of their four children moved to California for work—settling there permanently with his family. As he no longer expected to make regular use of the vacation house, he asked his three siblings to buy him out. Two of his siblings thought that was a great idea and could afford to do so, but the third sibling could not afford the buyout plan—and didn’t want to own a smaller share of the house than they would.
Part of the house’s charm was its age, but like many old houses, it needed costly repairs (along with regular maintenance). The brother in California didn’t want to foot these bills. And the three who used the house regularly had differing visions: One did not have the funds to contribute to repairs and maintenance, while the other two, who wanted to renovate the house lavishly, had different tastes in décor.
The three siblings using the house also had quite different lives: One was single and the other two had children. Because the larger bedrooms could fit several beds, it often happened that the single sister, an equal partner in ownership, wound up sleeping in the smallest room, which was also the noisiest.
Vacations at the house were drifting away from the sort of positive togetherness that Molly and her husband had envisioned for the family.
What can these four siblings do? At this point, their best answer is probably to exercise a lot of love and care to reach compromises, and accept that no one is likely to get exactly what they want.
Families can sidestep these kinds of frictions by considering the following advice.
The importance of estate planning when passing down a house
If you want to leave real estate to your children and possibly your grandchildren, consider taking these sensible estate planning measures—actions that will set the stage for family harmony in the future:
1) Discuss your vision. Talk with your children (and their partners or spouses, if any). Describe your vision for the vacation home’s future. Gauge their enthusiasm—and commitment—to your plans.
2) Consider selling. Based on the discussion in step 1, do a full cost-benefit analysis of keeping the vacation home, with the proper conditions for it to remain in your family (see step 3). Factor in emotional, as well as financial, costs and benefits. You can, for example, sell during your lifetime or have the home sold at your death, or put it in trust directing that it be sold at the end of a set period of years or upon a decision made by your children or descendants.
3) Leave the property in trust, naming a capable trustee, and fund the trust with enough liquid assets to maintain the home. If you are going to leave real estate to your children—even if you have just one child—estate planning measures can prevent the property from becoming a financial or administrative burden. If you can, leave enough money for the property’s maintenance and repair. The trustee will be charged with caring for the house. You may want to choose an independent, professional trustee (non-family), particularly if the trust is designed to last for multiple generations.
a. Carefully craft the trust agreement. If you want the family to have use of the property (but not the ability to transfer an interest in it) for generations to come, you can write those instructions into the trust when doing your estate planning. That way one child cannot ask to be bought out, and his or her siblings won’t be in the position of having to say “yes” or “no” to such a request. Alternatively, if you want to allow children to buy each other out, be sure to include provisions and procedures for this option in your trust agreement—there are many things to consider, such as agreeing on a third party to value the property, or the possibility that an interest could be transferred to a non-family member.
b. Supplement the trust agreement with a letter of wishes. Avoid putting too many instructions in a binding trust agreement that the trustee must follow. If you have general suggestions, these are best expressed in a non-binding letter of wishes, a complement to your trust agreement that can inform trustees of your values and intentions.
Your J.P. Morgan representative is available to work with you and your estate planning lawyers to help you put in place the right legal documents and trustees. Make sure what happens to your estate is what you want. We can help.
All case studies are shown for illustrative purposes only, and are hypothetical. Any name referenced is fictional, and may not be representative of other individual experiences. Information is not a guarantee of future results.