We were lucky enough to inherit a lake house on the Lake of the Ozarks from my wife’s parents. For those of you that watched the show “Ozarks” let me say for the record that the actual Lake of the Ozarks is nothing like the fictional Lake of the Ozarks in the show. The show makes it look like a backwoods place with cabins and a few small boats. In reality, it’s a happening party place where 40+ foot boats seem to be everywhere. We spend most of the summer here for a change of pace and a break from the Florida heat. The break from the heat part hasn’t worked out very well this year. Today, it’s “only” expected to reach 97 degrees, which will break our five-day 100-degree streak. In fact, I think we’ve experienced more 95+ degree days here than we would have had we stayed in Florida.
My wife and I have had conversations recently about what will happen with this lake house when we’re gone. Will my kids want it? If so, will they want it for the same purpose? What if one of them wants to use it as a vacation home and the other wants to either rent it out or sell it? And if they use it differently, will they be able to reach an agreement on how the maintenance costs and taxes be covered? What if the person that uses it the most is the least able to afford these costs?
According to the National Association of Home Builders, in 2023 there were 5.7 million second homes in the country. If you own one of those homes, you need to have a plan. If you are a financial advisor, you need to help your clients have a plan. Absent a plan, you are expecting your kids to peacefully agree on how your vacation home will be used or sold. Sadly, there are far too many examples where the agreement is far from peaceful or worse yet, there is no agreement at all.
Step #1 is to sit down with your kids and ask them if they even want the house. And if so, do they expect to use it as a vacation home, rent it out or a combination of each. At this stage in their lives, I fully expect my kids to tell us that “it depends.” Therefore, this needs to be an ongoing conversation. Life happens. Things change.
Unless both of my kids say they definitely won’t use the house and have no desire to rent it, we will place the house in a separate trust. We will then buy a second to die life insurance policy within the trust in order to provide funds for maintenance and taxes, thereby eliminating any potential conflicts about who pays these costs in the event one of my kids use it more than another. This trust can also address how the property can and cannot be used as well as how it should be maintained and under what circumstances it can be sold. I’m sure any such instructions will also need to change over time as it becomes clearer how my kids might use the house.
The bottom line here is that you are tempting fate if you think simply leaving a vacation house equally to each of your kids will not lead to conflict. The more valuable the house, the more likely the conflict – especially if each of your kids are in different financial situations.
