What is a Vacation Home LLC?
A vacation home LLC is a family business that allows a vacation home owner to pass down their property, specifying how the property can be used and how decisions will be made.
Many people from northern states and retirees from all over own vacation homes in Florida. Florida vacation homes have proven to be good real estate investments, and they are places where family members from various locations can assemble to enjoy one another’s company and create family memories. Typically, the older family members will purchase a vacation home as part of retirement planning or to escape harsh winter weather.
At some point, the vacation home purchaser will engage in estate planning for all their assets, including the vacation home. The purchaser controls the vacation home during their lifetime and typically wants to leave the vacation home and all other assets equally to their descendants.
But, ownership of a family vacation home presents unique estate planning issues. A beneficiary of the estate plan may not share the purchaser’s interest in a Florida vacation home and have no interest in using the home after the purchasers are gone. The descendants who do plan on using the vacation home will have to share its use and find a way to allocate financial responsibility for ongoing expenses and maintenance.
Vacation home owners hope their property will continue to be a source of family enjoyment for the next generation, but without proper planning, the home may end up being a source of conflict and confusion among children and their spouses.
Owning a Vacation Home in an LLC
An LLC is an effective tool to own and then pass down a family vacation home to the next generation. The vacation home LLC provides a liability shield that protects family owners from risks not covered by standard homeowner insurance policies.
The vacation home LLC also typically has a written operating agreement that specifies the terms for shared use and operation of the vacation home after the purchaser’s death. The purchasers can transfer their membership interest in the LLC to their living trust to avoid probate.
Operating Agreement for Vacation Home LLCs
All LLCs are governed by the terms of their operating agreements, which are contractual agreements of the LLC members. The operating agreement is very flexible, and LLC members may include in their operating agreement almost any terms and conditions that suit their purpose. An LLC operating agreement can govern the future generation’s use and management of a family vacation home.
Here are some of the vacation home issues that may be covered by an LLC operating agreement:
- When and how often do different family members use the vacation home?
- Who pays expenses of maintenance and ownership such as taxes, utilities, and repairs?
- Who decides whether to remodel or sell the home?
- Are there rules for use of the home such as non-family guests, cleaning, or pets?
- What happens if one family member no longer wants to use the vacation home and does want to sell their interest in the vacation home to another family member?
- What happens to the interest of a divorcing family member?
- How are vacation home disputes among family members resolved?
There are generally two ways for a vacation home LLC operating agreement to handle these, and other, vacation home issues. One way is to have all family members vote on vacation home decisions, and the other way is for the operating agreement to appoint certain family members as LLC managers and provide that these managers should make LLC decisions.
The vacation home LLC operating agreement can also appoint a trusted non-family member to arbitrate family disagreements regarding the vacation home. The overall goal is an LLC operating agreement that sets out a practical procedure for the family to share the vacation home, to treat fairly the family members who don’t want to use the home, and to minimize conflict within the family.
Vacation Home Partnership
A family limited partnership is another way to own a family vacation home. The appointed general partners manage assets including the vacation home. The partnership protects the individual limited partners from liability from uninsured claims. The partnership’s general partners are personally liable for claims, but they can protect themselves by filing an election with the State of Florida for treatment as a limited liability limited partnership.
The annual state filing fees are much higher for limited partnerships than for LLCs. For this reason, most families will use an LLC rather than a limited partnership to own a Florida vacation home.
Florida Vacation Home Trust
The purchaser of a Florida vacation home can also gift the vacation home to a vacation home trust, which is an irrevocable trust for the benefit of their descendants after they die. The purchasers would be the initial trustees and beneficiaries during their lifetime. After the purchasers are deceased, the trust agreement would name successor trustees, and their descendants would become the beneficiaries. A customized trust agreement would provide guidelines for the shared use and ongoing maintenance of the family vacation home. A trust protector can be appointed to mediate family disagreements.
A disadvantage of a vacation home trust is trustee liability. A third party may sue trustees personally for uninsured claims related to the family vacation home. The trust agreement may indemnify the trustees, but the individual trustees still may have to defend themselves against a lawsuit. Also, trust agreements typically exclude beneficiaries from participation in trust management, so using a trust to own a vacation home mostly eliminates most family members from decision-making regarding the use and operation of the vacation home.
Asset Protection of the Family Vacation Home
Each of the ownership options discussed above provides asset protection of each descendant’s interest in a family vacation home in the event a third-party creditor obtains a civil judgment against the individual descendant. Florida law limits a judgment creditor remedy against the descendants’ interest in an LLC or partnership that owns a family vacation home. The Florida statutes restrict the creditor to a charging lien on distributions from the LLC or partnership to the members or partners.
Vacation home LLCs are unlikely to generate net income that will be distributed to members and partners unless the property is sold. Prior to a sale, a family member’s creditor cannot claim any interest in the home nor interfere with the family’s enjoyment of the home.
A vacation home trust also protects the descendants’ interest in the family vacation home. Properly drafted trust agreements contain spendthrift clauses that prohibit the involuntary assignment to a creditor of a trust beneficiary’s interest in trust property.
About the Author
Jon Alper is an expert in asset protection planning for individuals and small businesses.
Sign up for the latest information.
Get regular updates from our blog, where we discuss asset protection techniques and answer common questions.
Looking for help?
Schedule a phone or Zoom consultation to review your specific situation. We help clients throughout the state of Florida.