Estate Planning for Vacation Rental Owners

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Vacation rental owners should consider estate planning for the next generation as soon as they purchase an investment property. As a substantial asset, vacation rentals deserve the care and attention you show your own home. While we don’t like to think about unfortunate events that could take place in our future, it’s important to plan for them just in case. If you want to make sure your vacation home stays in the family, secure financial benefits for loved ones or charities, ensure your property management company continues to reel in revenue, and prevent legal and financially draining fights over your property — in the event you pass away or find yourself unable to make investment decisions due to a medical condition — start estate planning for your vacation rental today. 

What Happens to YOUR Vacation Property — Without Proper Estate Planning

Knowing what could happen to your real estate in an unfortunate event can help put things in perspective when estate planning. Let’s take a quick look at what happens to a vacation rental when an owner passes away or becomes incapacitated due to medical issues. Without proper estate planning, things don’t always turn out as you hope…

If You Pass Away
In the absolute worst-case scenario, you are deceased…and without an estate plan, will, or trust, it’s up to your children or grandchildren to pick up the pieces. What does that look like? Well, it’s a rather expensive and long process to determine who now owns your family vacation home or rental property and/or how it will be transferred or sold. 

If You Become Incapacitated Due to Medical Issues
Should you suffer injury or illness that leads to the inability to manage your property’s assets, and you don’t have a power of attorney set in place, no one can legally act on your behalf. Managing your property now comes to a complete standstill…and so does your vacation rental profit

To move forward, family members will have to wait until a judge selects a guardian for you or names a conservator for your vacation property. Ultimately, this process is also time-consuming, and if there is more than one person in your family who believes they should be in control of your assets, expect a legal battle to break out and likely destroy relationships. 

Vacation Property Titles Matter

Yes, it’s important to consider how your property is titled when establishing a proper estate plan for your vacation rental. There are 4 common titling practices for vacation rentals: individual, joint, business, and retirement. To learn more about complicated and sophisticated estate planning techniques, like a Family Limited Partnership (FLP), reach out to an experienced estate planning attorney with extensive knowledge of the area.  

Individual Property Ownership
Owning a vacation property really is no different than owning any type of real estate. As an individual owner, it’s vital to have a will or trust along with your title to ensure your property is legally protected and has a plan for the worst. 

  • Without a Will Or Living Trust | Dying intestate basically means passing away without a legal will. Surprisingly, many people don’t have wills when they die, leaving everything they left in this world to chance…in court. State law usually selects an executor to inventory all estate assets and liabilities to help the judge determine who in the family gets what after ALL estate debts are settled. This responsibility is usually handed to the surviving spouse or registered domestic partner, with adult children next in line, followed by other family members. In the end, unmarried/unregistered partners, friends, and charities usually receive nothing. And if there are no relatives, the state takes everything. 
  • With a Will | Ah, this makes things a whole lot easier for your family. Your will has a named executor to handle the estate inventorying that will be submitted to the court to be probated. In the majority of cases, the court honors the plan set in place, then your named executor pays any debts and liquidates the estate. Any income generated by your vacation rental property is held safely in an estate account and is managed by your named executor. Once the vacation property is re-titled as your will states, and the estate has been settled, the new owner will receive the net income. 
  • With a Living Trust | Creating a living trust for your vacation rental is a smart move that allows your property to be transferred more easily. It bypasses the legal process of probate so your spouse, children, grandchildren, friend, or charity won’t have to worry about jumping through hoops and paying wads of cash in legal fees to possess the property when you pass on. Another great benefit of having a trust for your vacation home is any proceedings are private, so what’s been transferred to the trust isn’t public knowledge. A revocable living trust (RLT) is the most common type of trust used for short-term vacation rentals. 

Joint Property Ownership
Jointly owning a property with a spouse, partner, or friend gives allows the surviving party to receive an unlimited transfer of the estate from the deceased party without estate taxes or fees. However, potential tax benefits are different in every state, and the ease of transfer can sometimes depend on the circumstances around the death. 

It’s possible the surviving party may need to re-deed the vacation property in their name. And it’s vital the surviving party prepares estate planning with a will, trust, or another legal document to ensure everything transfers smoothly to whomever they wish after their own death. 

Common co-ownership titles for vacation rentals are joint tenancy with right of survivorship (JTWROS) and tenancy by the entirety (TE). 

Business Ownership | LLC/Partnership
Courts of law often play a lot of the cards when it comes to passing on vacation properties, so having a limited liability company (LLC) take ownership may be a better option for you. This is especially beneficial if you want to protect additional assets from a liability lawsuit. Or you could opt for a partnership or subchapter with an S/C corporation. 

Ultimately, whichever business ownership route you choose, they all feature formal establishment documents and provisions in case you were to fall ill or pass away. If the worst should happen, these official docs will finalize the liquidation and administration of the estate. 

Retirement Ownership | Self-Directed IRA / Sole 401(K)
Putting your vacation rental assets into a qualified retirement plan, like an IRA, 401(K), 403(B), SEP, or a CODA-SEP, allows you to name a direct beneficiary in the unfortunate event of your death. Formal plans and agreements can be drawn up to dictate what you would like to happen with your vacation rental. 

Pro tip: don’t name a trust as your retirement plan’s beneficiary…it can be super confusing and expensive to do a tax-favored final disposition and settlement of your estate.

Putting YOUR Vacation Rental in a Trust

With a trust, you can define restrictions, detail specific conditions, and add multiple layers before trust assets can be distributed how you would like, even extending to multiple future generations after you’ve passed. It’s important to use an established estate planning attorney when creating trusts and trust terms for your vacation property. Experienced attornies can also help with the re-titling process as well as transferring the estate assets to your trust. 

While there are a variety of trusts for one-time asset liquidation and distribution, the most common trusts are irrevocable trusts and revocable trusts. Do note irrevocable trusts cannot be unfunded once funded, whereas revocable trusts can allow you to move assets around or reverse funds. Carefully consider what makes sense for your circumstances to make the best use of the property when tax planning and putting your vacation rental in a trust! 

Qualified Personal Residence Trust (QPRT)
A common irrevocable trust for highly valuable real estate, a qualified personal residence trust can be a good option (always consult legal and financial advisors first) to pass your vacation rental or second home to the next generation as smoothly and efficiently as possible. With a QPRT, the homeowner is the grantor and can use the property for a set term of years before it is passed to the new owners. Any retained interest of the QPRT can achieve a discount for gift tax purposes as well. 

Downsides? Well, transfer tax benefits are lost if the grantor doesn’t outlive the QPRT. Should you die during your QPRT’s term, the fair market value of the property would be assessed and included in your estate for distribution according to your will (if you have one). Retained interest value depends on fluctuating IRS rates…and if you want your family to benefit from using less of your lifetime gift exemption, low rates could prove problematic. Keep in mind you won’t be able to alter this trust since it’s irrevocable (aka inflexible) and you won’t be able to sell the property either. 

Estate Planning for Injury/Illness

For your and your family’s peace of mind, it’s vital to prepare an estate plan in the case you become incapacitated due to an injury or illness. We know it’s hard to imagine someone else in control of your vacation rental investment decisions. However, once you’ve created a plan, you rarely need to think about it again. 

Writing up and executing a durable family power of attorney (DFPOA) is a relatively easy and inexpensive way to prepare. And without a power of attorney to take over owner responsibilities for your vacation rental, property management, maintenance, housekeeping, inspections, etc. could come to an all-stop — basically pressing pause on revenue generation. Not to mention, there will probably be a costly legal battle to gain control of your estate assets, and the court won’t always pick someone you like…

Durable Family Power of Attorney 
Giving you the flexibility to fine-tune exactly what you would like to happen should you become incapacitated, a durable family power of attorney can be as broad or narrow as you like. You can specify what your POA is allowed to do and not do and even assign different people to handle different aspects of your vacation rental business — including executing management agreements, paying for any repairs, coordinating property projects, or selling the property on your behalf. Combine a DFPOA and a will for a strong estate plan foundation for your vacation rental!

Start Estate Planning Today

As a vacation rental owner, how can you start estate planning today? First, reach out to an experienced, licensed attorney in your state. They can help guide you through any and every legal process to create a solid estate plan for your vacation property. Second, you will need to draft a will and a durable family power of attorney. While in this process, we recommend drawing up a living will, aka an advanced medical directive, as well. 

Next, you will need to store your legal documents together in a safe place. Now it’s time to let any family members or close friends know your estate plans so everyone who would be potentially impacted is aware of your wishes. It’s also good to review your vacation rental estate plans at least once a year, especially if a big change happens in your life, like a divorce or death, that could change your mind on a few things. 

Legal Advice
Please note vacation rental estate planning presents unique challenges. While we offer tips to help you plan accordingly, we recommend seeking further advice from a locally licensed attorney and CPA for personal estate planning, writing wills, creating trusts, and any other legal matters regarding your vacation home. 

Financial Advice
Remember to consider federal and state taxes when estate planning. If you own a large vacation property, additional estate taxes may apply. Consult with your financial advisor for detailed information on your property. 

Questions Or Concerns?
Speak with a professional attorney or chat with Kevin Vozar, our Director of Business Development at Georgia Cabins for YOU who has decades of experience with vacation rental management. 

Kevin Vozar
Director of Business Development
615.517.8354 
kvozar@cabinsforyou.com