Legacy Homes

Take-away: The immediate distribution of a large home after the owner’s death can become a burden on the heir who receives title to the home. Leaving one home to several beneficiaries is also problematic. Keeping a family home or cottage in continuing trust after the owner’s death for a period of time can accomplish several objectives, not the least of which is giving the beneficiaries time to make informed decisions about the home.

Context: After my Petoskey presentation last week a client approached me about some frustration that she encountered dealing with her northern Michigan waterfront home. The client had two adult children; one lives on the west coast and the other in the deep south. The client said that her existing estate plan directed the trustee to flip a coin after her death to decide which of her two children would receive the northern Michigan home. She asked my opinion of viability of the ‘coin flip’ as an effective mechanism to dispose of her home after her death. I politely responded that while flipping a coin was clearly efficient,  I did not think that it was a reliable, or responsible, way to dispose of a $2.0+ million home on her death.

Possible Solution: I shared with this client an approach that I sometimes used when I was still preparing estate plans to deal with what I called legacy homes, which would equally apply to retirement homes, modest cottages, or vacation homes/condos in other states.

• Use of Continuing Trust: I suggested to the client that her home remain in trust after her death- a continuing trust. Her children/grandchildren needed to go through the grieving process. Thrusting the decision ‘do you want the northern Michigan home as your part of your mother’s estate?’  forced a decision on the heir when that heir was emotional, grieving, and simply needed to adjust to the reality that their parent was no longer with them. In addition, if the home was important to the client (holding it well into old age when it was expensive to maintain) sometimes their child would take the home out of guilt, or a misguided desire to create an homage to their deceased parent, for whom obviously holding onto  the home  until death was important, but which also carried the implication that the home was retained for the benefit of the child, hence triggering the guilt response. So, by holding the home for a set period of time in a continuing trust translates to the reality that neither child ‘got the northern Michigan home’ to the exclusion of the other child, nor did any decisions have to be made by either child while emotions ran high after their mother’s death. Time needs to pass before the heirs can objectively make any decision with regard to a major, non-income producing, income consuming, asset held by their mother until her death.
• Use of Side-Fund: Sometimes parents are unsure which of their children will actually use or enjoy the home. It would be unfair to leave the home to three children, one who lived in Grand Rapids, one who lived in St. Louis, and the other in Sacramento. Guess which one will use the home more  on weekends? If all three children own the home equally as tenants-in-common, they will have to pass-the-hat to pay for the expense of maintaining the home. Passing-the-hat to pay a pro rata share of the real property taxes for a home/cottage that one might visit only once every three years for a two week vacation in the summer is bound to create resentment- “I seldom use it, but I still have to pay my share of the expenses.”  Even more resentment is generated in the spouses of the decedent’s heirs; they will not own the asset yet their family unit will have to spend limited resources to maintain an asset that they seldom use and will never own; the “sorry honey, we can’t buy you a new car to replace the old one you’ve been driving the last 9 years, as I’ve got to pay my share of the property taxes on the northern Michigan cottage”  is never a message that is received well on the home front.  That dynamic puts a lot of pressure on the heirs and their family units. If the title to the home continues to be held in trust, along with a ‘side-fund’ used to pay taxes, insurance, utilities, and general maintenance expenses, then arguably the payment of those expenses will not deplete the heir’s family resources. Admittedly the child receives a smaller inheritance if some resources are held back in the side fund, but depleting the side-fund is less offensive than ‘passing-the-hat’ to pay to maintain a home that might seldom  be  used due to geographic distance or family dynamics, e.g. the grandchildren’s summer activities prevent the family from travelling to Michigan for a few weeks in the summer to use the cottage, while the child who lives in Grand Rapids can still use the cottage, even in the winter, for ski weekends.
• Side-Fund Amount: It is hard to predict today what amount is appropriate to create the side-fund that will be depleted over time to maintain the home held in the continuing trust. Rather than pick an amount today, and simply hope that it is sufficient to pay the expenses associated with the home for the continuing trust’s duration, why not let the trustee identify that amount? I reviewed a trust this morning that set aside $100,000 to maintain a large home in northern Michigan for several years. If the clients live another 10 years, I seriously doubt that the $100,000 set-aside will be sufficient to maintain the dwelling for more than three or four years. If the side-fund amount is inadequate to maintain the home for the continuing trust’s duration, we are then back to the trustee ‘passing-the hat’ among the trust beneficiaries which again can lead to resentment (of the beneficiaries’ spouses) or worse intra-family conflict when one heir is unable to come up with their share of those costs, often with good reasons, e.g. “I would love to contribute this year but I am currently putting three kids through college. Can you cover my share for the next couple of years until I get the kids out of college?” I would prefer to have the settlor direct the trustee to identify the amount of liquid assets held in the trust that will necessary to meet all the projected expenses that are associated with retaining the home in the continuing trust. The determination of the amount necessary for this purpose will be made by the trustee after the settlor’s death, when those expenses can be more accurately estimated, including possibly some big future expenses that are more easily identified, e.g. the roof will need to be replaced; the septic field will have to be replaced, etc.
• Use of Real Estate: Some heirs might be highly optimistic in their planned use of the home after their parent dies. But life often throws us curve-balls, and what was envisioned as every weekend at Mom’s home up north, may be totally unrealistic as life plays itself out. Resentment (with hindsight) might easily appear if one child took the northern Michigan home, and the other child received a marketable portfolio of equivalent value, where the one child seldom uses the home that they wanted and thought they would use every weekend. By continuing the home in trust for a period of time, all children have the opportunity to use the home, or to discover just how much they or their family will actually use the home. Equally important is the use of the trust to hold title when the parent is inclined to simply distribute title to all children as tenants-in-common. I often described this to clients as “putting all of their children in a small rowboat with one set of oars.” By leaving title to the home in the trustee, with the children each having equal opportunity to use the home, no one wins, or loses, for a select period of time. During this continuing trust period the children can then ascertain if they can coexist with one another  using the same home. They might find that they have entirely different view of the use of the real property, or the time and responsibility they will incur to open, clean, and close the real property if it is a seasonal home. The shared use often becomes as source of major friction I found over the years- one kid brought their dog, yet the other kid who next used the cottage had allergies; one kid used the home but never washed the bed linens, leaving that responsibility to the next child who came to use the cottage.
• Termination of the Continuing Trust: After a period of time, e.g. 3 or 5 years, the trustee is directed to appraise the home and furnish a copy of the appraisal to all of the children. They can then decide to sell the home and distribute the net sales proceeds, or if they found that they could coexist with one another over the prior 3 to 5 year period, then they might direct the trustee to forego a sale and simply distribute the title to the home to them as tenants-in-common. If one child wanted the home, but the others did not, then a mechanism could be put in place to facilitate the one child’s purchase of the home, perhaps having to obtain a mortgage to cash out their siblings who were not interested in owning the cottage. Sometimes the purchase price, as prescribed in the trust, would be a portion of the appraised fair market value of the home, to reflect the legacy aspect of the parent who wants to keep the home in the family for the next generation.

The point to all of this is that parents are never sure who wants their legacy asset or whether their legacy asset will actually become a burden on the child who receives it.  What the parent envisions as a legacy may not be shared by their children, but the children are too polite or respectful to be honest with their parent that the parent’s legacy is really a white elephant. Asking a child to make a decision with regard to the legacy asset shortly after the parent’s death is both unfair to the child who needs time to get through the emotion of losing  a parent, and imposing a short deadline might also produce a bad decision, using hindsight. This is just one of many options where we can provide good counsel to our clients that decisions do not have to immediate be made shortly after their deaths, and that we can serve an invaluable role in provide guidance to their heirs and over time enable their heirs to make a more informed decision if the asset is really a legacy worth preserving, or merely another asset that should be liquidated.