The Pros and Cons of Putting Your Vacation Home in a Trust

Owning a vacation property, whether it’s a lake cabin, beach condo, or mountain retreat, can be one of life’s great pleasures. Vacation homes are perfect for fun with friends, the entire family or even for business purposes. However, vacation properties, especially if the property is located in another state, can also create complicated questions about inheritance, taxes, and long-term management for future generations. One estate planning strategy many owners consider is placing the property in a trust. 

A vacation home trust can offer meaningful benefits, especially for families who want the property to stay in the family for future generations. However, use of a trust necessarily entails costs of administration and other potential downsides. Clients must carefully weigh these pros and cons when deciding on how best to structure the long-term ownership of a vacation property.

What Does It Mean to Put a Vacation Property in a Trust?

A trust is a legal arrangement where the owner of the property transfers ownership to a trustee in order to hold and manage the property on behalf of one or more trust beneficiaries. A trust agreement is prepared that outlines the specific instructions by the person who creates the trust (the trust settlor or grantor). Many times, the settlor and the trustee are the same person at the beginning of the trust. 

Therefore, instead of owning the vacation home directly in your own name, the trust becomes the legal owner of the property. The trust agreement specifies how the property is used, maintained, and eventually transferred at some future date.

Pros of Owning a Vacation Property Through a Trust

1. Avoiding Probate

One significant benefit of using a trust is avoiding probate. By use of a trust, there is no need for court intervention to appoint a person to take over management and distribution of the property upon the death of the owner. 

If the vacation property is titled in the trust during the owner’s lifetime, then the following advantages are available:

• The management of the property seamlessly continues under the successor trustee’s authority in accordance with the trust’s terms 

• Beneficiaries avoid court delays that occur when the original owner dies 

• Privacy is preserved because probate court records are public

For families with significant assets, or where probate court proceedings can be lengthy or delayed, these benefits can be a major advantage.

2. Easier Transfer to Multiple Heirs or Maintain Long-Term Family Control

Vacation homes often create conflict among heirs. However, in the right situations, it can ensure that a beloved vacation home remains in the family for future generations. A trust agreement can set forth clear rules and guidelines as follows:

• Who can use the property

• When each family member can stay there 

• How expenses like taxes, insurance, repairs, improvements, and maintenance are shared 

• What happens if one or more beneficiaries want to sell their share

Without these rules, surviving family members will typically disagree about how to manage the property. A trust can ensure the property remains in the family for generations.

3. Potential Asset Protection and Estate Tax Planning

Depending on the trust type, there may be some protection from creditors or legal claims affecting beneficiaries. High net worth families may also need to consider use of certain trusts to help reduce estate taxes. 

While protection varies widely by state and trust structure, certain irrevocable trusts can help shield assets from future liabilities. Other strategies that may be considered for estate tax planning can include grantor trusts, qualified personal residence trusts (QPRTs), and other irrevocable trusts.

Cons of Putting a Vacation Property in a Trust

1. Setup Costs and Ongoing Administration Costs

Creating and operating a trust involves a variety of expenses. The initial costs include:

• Attorney fees to draft the trust

• Recording and transfer fees to deed the property into the trust

• Possible tax planning consultations

Once the trust is created, there are various expenses associated with keeping it operating:

• Accounting and recordkeeping

• Potential tax filings (for certain trust types)

• Trustee compensation in the event that a professional / corporate trustee is used

These added layers of administrative costs do not exist when the property is owned by an individual.

2. Mortgage or Insurance Complications

If the vacation property is subject to a mortgage loan, transferring it into a trust typically requires notification to the lender in order to get the lender’s approval. Some lenders will not grant their approval to transfer the property to a trust because the loan is in the name of the owner of the property, and not the trust. 

In addition to notifying the mortgage lender, it is important to also contact your insurance agent in order to update the property insurance to insure not just the original owner(s), but also the trust.

3. Less Flexibility with Irrevocable Trusts

Some trusts—especially those used for tax planning—are irrevocable. While trusts can provide for certain types of flexibility (discussed above), they can also restrict flexibility as follows:

• You may lose direct control

• Changing terms can be difficult

• Removing the property from the trust may not be possible

4. Family Disputes Can Still Happen

This can be a serious limitation if circumstances change. Some owners creating irrevocable trusts can get “buyer’s remorse” and change their mind after it’s too late. Unwinding the trust can involve significant legal expense.

While trusts can help reduce conflict, there is no guarantee that a trust will eliminate conflict. Family members sometimes will still dispute various issues regardless of how the property is owned. These disputes may involve usage schedules, maintenance costs, or whether and when to sell the property. Even with a trust, clear communication and family agreements are essential.

Situations Where a Trust Often Makes Sense

Clients may find a trust especially useful in the following situations:

• You want the vacation home to stay in the family for future generations 

• Multiple heirs will inherit the property and will want to use it in the future 

• The property is located in a different state than where you reside

• You want to avoid probate delays

• The property has significant financial or sentimental value

When a Trust May Not Be Necessary

A trust may be less important if:

• The property will likely be sold after death

• There is only one heir

• Family members have little interest in using the property in the future

• Your estate plan is not complex

• The property value is modest

In these cases, other estate tools might accomplish the same goals more simply and at lower cost to you.

Reach Out to Learn If Putting Your Vacation Home In a Trust Is Right for You

A vacation home can be one of the most meaningful assets a family owns. Using a trust to hold that property can simplify inheritance, protect family relationships, and provide long-term structure for use by future generations. 

However, trusts are definitely not one-size-fits-all solutions. Deciding whether to make a financial investment to create a trust framework depends on your family dynamics, financial situation, and long-term goals. 

Before transferring property into a trust, contact the estate planning team at Plakas Mannos in order to discuss your particular family situation to decide what is the best strategy for you.

About the Author

David Dingwell is a member at Plakas Mannos where he provides ethics and professional conduct advisory services, as well as probate, estate, and trust administration and planning.