I’ve had numerous clients leave family homes—from beach houses to picturesque farms—to their children as part of their estate plans. However, despite the best of intentions, this decision isn’t always in the best interests of the heirs.
The reality is that inheriting a family home can be more of a burden than a blessing due to the high cost of maintenance, property taxes, insurance, legal fees and other expenses. It’s also incredibly complicated and cumbersome to “share” a property between multiple parties.
How will your heirs determine who can stay at the property on certain dates? If the property will be leased as a short-term vacation rental when it’s not in use, who will handle the logistics and the disbursement of revenue? Will your children form an LLC and hire a property manager? And who will make financial decisions regarding repairs and pay for upkeep of the property?
Remember that real estate often comes with emotional attachments, which can prevent your children from making smart financial decisions. Too often, families imbue real estate or other assets with emotional power–including the rosy haze of childhood memory–which can cloud their judgment when it comes to making strategic financial decisions. I’ve seen family homes become cash-flow negative money pits as well as emotional black holes. In addition, family homes can serve as a major source of strife between siblings, since every child has a different opinion about whether mom would love the color of the new furnishings or whether dad would approve of the plan to convert the garage into a rental apartment
So instead of gifting the primary family house or a vacation home to your heirs as part of your estate plan, it’s far more strategic to treat family property like any other asset in an estate. You can stipulate that all real estate be sold upon your death and that the proceeds be divided evenly between your heirs. Some family members may choose to take the proceeds as part of their distributed share of the estate. Others may elect to “buy out” other heirs if they truly want to assume full ownership of the property.
Remember that transparency is key when it comes to planning for the smooth transition of assets as part of any estate plan. So it is smart to discuss your wishes with your family in advance, so there are no surprises and everyone is on the same page.
Taking a more analytical view of family real estate–and treating it like an asset on a balance sheet rather than a repository for shared memories–will ultimately benefit everyone, helping to position your heirs for long-term financial success.
This article was originally published to subscribers of The Wall Street Journal, found HERE.