Minimizing Conflict When Inheriting a Property with Your Siblings
That cabin on the lake or beach cottage may have been the setting for decades of happy family gatherings. But that doesn't mean inheriting a second home will be a vacation for you and your siblings.
Fortunately for Bill Ringham, director of private wealth services for RBC Wealth Management in Minneapolis, he and his three siblings communicate well and amicably share the cabin their parents passed down to them.
For 17 years, Ringham and his siblings have managed to agree on the main issues and gather at the property to celebrate major holidays. He said they generally agree on things like deciding when the cabin needs to be painted, even if they don't always agree on the color.
But not all families are fortunate to get along so well. Not all siblings necessarily have the same interest in keeping or maintaining that property.
In some cases, parents assumed their children would always be in sync and didn't make arrangements to prepare them for potential conflict, said Lee Hausner, Ph.D, co-author of “The Legacy Family: The Definitive Guide to Creating a Successful Multigenerational Family."
“Our parents just assumed we'd all want to keep the cabin in the family, but I always think it's a fair question for parents to ask their kids whether they want the vacation home," said Ringham. “It was an eye-opening moment for me when I realized I love the cabin but another sibling wasn't as excited about it. Ironically, that sibling really enjoys it now and is happy we kept it."
Shared non-financial-generating assets, such as a boat, an airplane or a summer home, create the possibility of enormous conflicts, said Hausner.
“The family home has all kinds of neurotic, emotional attachments," said Hausner.
For example, the mother may have left a pair of lounge chairs that one daughter refuses to replace, even if the mother herself would have been appalled to have those old chairs in her home today.
“It's exactly the kind of thing that can cause siblings to stop speaking to each other," she said.
Options for How Siblings Can Align on What to Do With an Inherited Home
The most important thing families can do when transferring or sharing property is to be transparent, otherwise you run the risk of ruining relationships, said Alma Banuelos, National Head of Trust and Estate services for City National Bank in Los Angeles.
If a vacation home is part of the estate you inherit from your parents, you and your siblings have several options for coming to agreement on what to do with the asset that will help ensure each person's wants are met.
Share the House With a Formal Agreement
If all the siblings inherit the property equally and want it, it's important to establish a partnership agreement that establishes usage rules, such as how often people get to use it, who takes priority and guest privileges, said Banuelos.
“You should even outline the types of usage and how many guests are allowed at any given time to avoid conflicts," said Banuelos. “For example, you may not want your single brother to throw a New Year's Eve party for 150 people that could potentially cause some damage to the house. You may also want to consider if anyone can rent the property to others during their scheduled time, and who will handle the home's condition before and after that rental."
An important element of the agreement also includes the sharing of maintenance/expenses, which Banuelos said could be based on the ownership share of the property, usage, or other methods.
Some parents opt to transfer the deed of their vacation home to their kids during their lifetime and set up a fund to pay for maintenance expenses and property taxes, especially if the property is in an expensive area such as Martha's Vineyard or on the beach in Malibu, she said.
If that wasn't part of the estate plan, you'll need to establish an expense account for the property. This avoids the problem created when there is a need for a capital improvement — such as the leaking roof that needs to be replaced — and your siblings claim that they do not have the spare cash to chip in for repairs.
“You also need to decide how to select the vendors for the repairs, just consider if one sibling wants to go contract with the cheapest option while another wants to hire a more expensive provider, if it was spelled out in an agreement, there is less risk of a disagreement between the siblings" Banuelos said.
Another option is to hire a property manager to handle ordinary repairs, rent the property if desired and make common decisions, which is particularly advantageous when the owners/siblings are of significant distant from the vacation home. The cost is typically shared by the siblings.
“A formal agreement may be necessary as the next generation inherits the property, because instead of a couple of siblings, you start to have multiple cousins and their families sharing the property," said Ringham. “In our case, if we all gift our share of the vacation home to our children, we'd go from four owners to nine owners."
Hausner recommends creating a governance board, similar to a condo board, so that family members aren't left trying to figure out how best to run the home. And families should have a healthy system to make what Hausner calls “cash calls"— discussions on spending money on the property with guidelines agreed upon before the expenses arise.
Structure a Buyout
In some families, one heir may live too far away to use the vacation home with any regularity - or may not have the resources to contribute to its upkeep. If that sibling would prefer cash rather than partial ownership of the vacation home, the executor may be able to allocate other parts of the estate to him or her, in order to equalize the inheritance, said Ringham.
If the estate doesn't have liquid assets or there's not enough assets in the estate, the family members who want to keep the vacation home can buy out the other relative with their own funds.
“The siblings need to make sure they structure a fair price for the share of the property and may decide to use a couple of valuations," said Ringham.
If the siblings don't have the cash to buy out the other's share of the home, they may consider taking a home equity loan on the property, said Banuelos.
“The siblings can also agree to accept a promissory note, in which both sides agree to the terms and interest payments," she said. “You need to consider what will happen if a payment is missed. If an interfamily loan is appropriate for the family, to avoid animosity between the siblings, you may wish to consider an outside agent to collect the payments."
Sell and Split the Profits
If none of the heirs want the vacation property, the simplest solution is to sell it and share the proceeds as part of the estate, said Banuelos.
If you choose to sell, Hausner said it's important to use best business practices and have the house professionally appraised. Family members can have the right of first refusal, but only at open market value.
Even if siblings agree to share the vacation home in the beginning, it's wise to establish an agreement regarding under what conditions the family would consider a future sale, said Banuelos.
“You should agree about who has the right of first refusal, such as whether it's limited to immediate family members or extended family," said Banuelos. “Or you can develop a limited list of buyers."
You should also define a method for determining the sales price to avoid future disagreements, she said, including whether the price is based on the current market value or a discounted value.
Rent and Split the Profits
If none of the siblings want to use the property for vacations but it's a valuable asset, they may want to turn the house into an investment. One way to do this, suggested Ringham, is to create an LLC that holds title to the property with rental income flowing through the business.
“Some type of partnership agreement needs to be in place, ideally with an independent property manager who will maintain the property and rent it," said Banuelos. “You need to establish in the agreement the type of tenant, such as a short or long-term renter, the preferred rent and how decisions will be made about repairs and improvements."
A property manager will usually charge a fee; a percentage of the rental income, said Banuelos, but will relieve the pressure on the owners to make daily decisions and handle routine maintenance.
If family members who inherit a vacation home cannot agree on what to do with the property, a last resort is an action to for partition the asset.
“If there's an independent trustee of the estate who's not a family member, that person depending on the governing document, could have the authority to sell the property," said Banuelos. “If a sibling is the trustee, that person or another sibling could petition the go to court for instructions on what to do with the property. Getting a judge's blessing to sell the house removes liability from the trustee for the decision."
Legal action can be expensive, since each sibling is likely to hire a lawyer and there could be multiple appeals, said Banuelos. “There's little advantage to prolonging the issue through the courts if there is an informal method to resolve the conflict," she said.
Parents can also stipulate to their trustee as part of their estate plan that should the siblings disagree to share the vacation home, or it must be sold, said Banuelos, which can mitigate in-fighting.
Establishing Written Agreements Can Reduce Animosity
“It's best to formalize an operating agreement as soon as possible after an inheritance to get ahead of future conflicts while everyone is getting along," said Ringham. “Siblings will be much better off if they agree on how they'll handle usage, maintenance and future transfer options before someone's unhappy."
Keeping families connected is the main goal of a vacation home, so Hausner suggests that even if the inherited property doesn't work for everyone, families could consider planning trips together, buying vacation condos in the same complex or buying land with space for each branch of the family to build their own cabin.
After all, as the old saying goes, families that play together stay together.
Managing an Inherited Home
Given the complexity and number of options available when gifting or inheriting a home, it's important to consult with professionals every step of the way.
City National Bank's wealth planners can help you create a plan to ensure the inherited property continues to be a source of joy for your family.
This article is for general information and education only. It is provided as a courtesy to the clients and friends of City National Bank (City National). City National does not warrant that it is accurate or complete. Opinions expressed and estimates or projections given are those of the authors or persons quoted as of the date of the article with no obligation to update or notify of inaccuracy or change. This article may not be reproduced, distributed or further published by any person without the written consent of City National. Please cite source when quoting.
City National, as a matter of policy, does not give tax, accounting, regulatory or legal advice. Rules in the areas of law, tax, and accounting are subject to change and open to varying interpretations and readers should seek professional advice.