Your cabin is more than a piece of property, it is a place where memories are made. Wherever your cabin is located, it is a place to treasure the days of swimming, fishing, hiking, skiing, or just wiling away an afternoon. These moments spent with family and friends will be recounted time and time again at the family dinner table, a tradition your children, grandchildren, and great-great-grandchildren will continue in the future. Preserving your cabin for future generations requires forethought and planning. While the cabin allows you to forget about such everyday matters as taxes, mortgages, and future repairs, these are exactly the factors you should address so that your cabin can remain part of your family in the years to come.
The High Costs of Cabin Ownership
Your investment in your cabin returns untold personal rewards. The lifetime of memories you earn is worth every dime you invest in buying and maintaining your vacation home. No doubt your children feel the same way. However, good intentions and deep love for the cabin will not pay the bank, the IRS, the insurance agent, and the contractor when the roof begins to leak. While forming your estate plan, be mindful of the financial obligations associated with owning the cabin. You can defray these costs through careful planning so your kids never have to worry whether they can afford the place.
Forms of Property Ownership
In your heart, the family cabin belongs to your entire family. However, only the deed-holders are the true legal owners and the form of ownership affects their rights to the property.
Tenants by the Entirety Married couples typically hold real property as tenants by the entirety. Under this type of deed, you and your spouse are equal owners of your cabin so when one of you dies, the other will own the property. Many couples do not consider that the surviving spouse may remarry down the road. If the surviving spouse then dies or divorces, the future spouse may have a right to the cabin.
Joint Tenants with Right of Survivorship As joint tenants with right of survivorship, two or more people have an undivided, 100% interest in the property. When one owner dies, the other owners absorb the decedent’s interests. If you were to deed the property to two siblings as joint tenants, for example, the sibling to die first could not bequeath the cabin to her or his family, but instead the surviving sibling would acquire sole ownership. The cabin would pass down one line, instead of to your grandchildren and great-grandchildren as you might intend.
Tenants in Common Tenants in common own individual shares in the property, which may be of unequal size and can be transferred to third parties through sale or inheritance. The percentage owned by one child could be subject to a creditor’s lien if the child acquires a large debt, a circumstance that could put the property in jeopardy. Your child’s spouse could also lay claim to your child’s share of the cabin should she or he divorce.
Benefits of a Trust
A living trust – often referred to as an inter vivos trust – is an estate planning instrument that allows you to control the use, transfer, ownership, and funding of your cabin during your lifetime and upon your death. The trust, not you or your children, owns the cabin. The trustee manages the trust’s assets on behalf of the beneficiaries. You may act as both trustee and beneficiary. When you die, the remainder of the trust passes to the family members you named as beneficiaries to be managed by the person you named as trustee. This arrangement offers several advantages for you and your family, as outlined below.
Protecting Your Cabin from Creditors Because the trust owns the cabin rather than you, your creditors cannot attach liens to the property. At the time of your death, the cabin would not be considered part of your estate and would therefore not be subject to estate tax rules. Likewise, your kids never own the property either, and can therefore avoid the risk of creditors’ liens in the future.
Paying Expenses Your children may not be able to afford the mortgage payments, taxes, property insurance and upkeep on the cabin. Without financial resources, they might one day face the heartbreaking decision to sell the home they cherish. By depositing money into a trust, you can ensure that funds are available to cover the high costs of homeownership.
Keeping the Peace When multiple families are involved, they might not agree with one another on the amount of maintenance and upgrades needed on the property and the division of responsibilities. Leaving these tough decisions to your children can place an unnecessary strain on their relationship. The trust account takes the money out of the equation so your children can enjoy the cabin without calculating who owes what.
Reducing Taxes Some types of trusts offer substantial income tax benefits. Money the trust earns on investments belongs to the trust, not to you personally, and so may not be considered income. Your financial advisor or lawyer can counsel you on the appropriate trust formation that meets your estate planning and taxation goals.
Paying Off Your Mortgage
A spouse or children who are not on your mortgage cannot automatically take over payments. Upon your death, the bank expects full payment if you are the only borrower. Do not assume that refinancing is an option for your family. Lending requirements have become very strict. Banks insist that the borrower make a steady income, which may be problematic for a retiree, regardless of her or his level of financial security. Your kids’ credit may be affected by student loans or mortgages on their primary residences.
Ideally, owning the cabin outright relieves your family of refinancing concerns. However, paying off the mortgage may not be the right option for you, especially if it would mean transferring funds from other stable or lucrative investments, such as your IRA or a stock portfolio earning higher returns than the interest you are accruing on your mortgage. Even if your estate is able to pay off the mortgage, your surviving spouse could be placed in the position of choosing between the cabin and other treasured assets or crucial income sources. One solution is to take out a life insurance policy in the amount of your remaining mortgage. The beneficiary can pay off the mortgage with the proceeds and the money is often tax-free.
Your Next Step
Because these matters are complex, it is important to retain a lawyer with knowledge about the estate laws of the state where you live and state in which the cabin is located. No matter how healthy and young you are, it is never too soon to start planning for the future. With a well-considered estate plan in place, you can confidently imagine your great-great-grandchildren’s dinner conversation about how much fun they had at the cabin.