Rather than having the heirs own the property directly, lawyers recommend placing homes in a limited liability company and setting up a trust for the kids’ benefit that holds interest in the LLC. 

These legal maneuvers protect assets in several ways. For instance, if a vacation home is rented and a tenant slips and falls, the heirs are not held personally liable for any damages. 

“Your other assets, stocks, bonds, are not subject to any creditors’ claims,” Doyle said.

It also shields heirs from the liabilities of their siblings, according to Dan Griffith, director of wealth strategy at Huntington Private Bank. For instance, if one heir files for bankruptcy, the LLC structure prevents the creditors from putting a lien on the shared home, he said. 

You can also save on transfer taxes by gifting interest in an LLC that owns the property rather than putting heirs’ names on the deed, Griffith said. Since these fractional interests are illiquid, parents can claim a discount on the taxable value.

Parents can put rules in place with an operating agreement for the LLC. Clients can use the document to make sure the home doesn’t end up in the hands of their children’s spouses, which is a common concern, according to Northern Trust’s Laura Mandel.

“Typically families want to retain these properties along the bloodline,” said the chief fiduciary officer.

Parents can restrict an LLC interest from transferring to surviving or former spouses of their children. With a well-drawn trust, it would be difficult for the spouse to contest it in court, Mandel said. These operating agreements often include buyout provisions that allow the heirs to buy out the spouse.

Parents can also use the document to guide how the property is used, such as laying out how many holiday weekends each child gets, who has the right to redecorate or whether the home can be rented out or used for weddings.

Leaving these issues unaddressed can cause fights among siblings. Mandel recalled a set of four siblings with a large ranch out west that they rented out frequently. After complaints that the ranch felt like a “VRBO,” Mandel helped the siblings reach an agreement on how the property could be used.

Money is the most common trigger for family feuds, Griffith said. An inherited home can quickly become a financial burden unless the parents also set aside cash to pay for the upkeep. 

“What ends up inevitably happening there is that one person pays the bills, and then enormous resentment grows, because either that person has to ask their siblings or cousins for money and sometimes those people don’t pay,” he said. “Or they say, ‘Hey, I’m the one paying all the bills. How come I don’t get to use this more often than any of the rest of you?'” 

Doyle recommends that parents use liquid assets like marketable securities or take out a life insurance policy in order to endow the trust. This outlay makes it possible for siblings to hold onto the home even if they can’t afford to share the expenses.

“In a lot of cases, you may have some kids that can afford to pay the maintenance expenses, and others can’t, so how do you treat them equally?” he said.

However, the operating agreement should still include a contingency plan for dividing expenses if the trust runs dry. This is especially important for waterfront homes that are expensive to insure or susceptible to erosion. 

Parents often assume that their children will want to keep the home, according to Mandel. However, even if heirs initially agree to, they may change their minds later. Perhaps they grow tired of sharing a home with their cousins or a death in the family changes the equation, she said. For instance, Mandel worked with a ranch-owning family where the only sibling with working knowledge of the property passed away unexpectedly, which upended the living siblings’ plan to run the ranch. 

It’s important to plan for the likelihood that some or all of the heirs will want to cash out. Doyle suggests creating buyout provisions that allow heirs to buy their siblings’ LLC interest even if they don’t have the liquidity, such as taking out a promissory note. The assets in the trust can also be used to buy siblings’ interests in the LLC.

“What you’ve got to build into any plan is an understanding that people’s circumstances and situations can and will definitely change,” he said. “Maybe they’re going to have kids, or their job changes, or their health changes. Things change.”

This can be hard for parents to reconcile, but keeping heirs’ hands tied defeats the purpose of a vacation home, Griffith said.

“If your grandchildren don’t have any ties to this place, no one lives here, no one grew up here, nobody cares, then do you really care if they sell the place?” he said. “If somebody else who really does care about it gets to enjoy it, is that such a bad thing?”