Beach houses are often perceived as the pinnacle of achievement for a high-net-worth family. Like the Bush or Kennedy family compounds in New England, they evoke thoughts of multigenerational ties and shared values, songs by the campfire and touch football on the lawn.
And then there's the reality.
When Stacy Allred, a director in the wealth structuring unit of Merrill Lynch's Private Banking and Investment Group, sat down to work with a West Coast family on preserving their cherished gathering spot along with a sense of multigenerational harmony, she quickly found herself dealing with a challenge that has cropped up for many baby boomers and their children. While a beach house, mountain retreat or European villa may be just a vacation home, it is also charged with emotions and family history that must be considered when the time comes for the next generation to take possession of that beloved second home.
A Small Cabin Becomes a Large House
In the case of Allred's clients, a young couple living in San Francisco back in the 1960s bought a small cabin on a large piece of land on the coast, two hours from the city. What was at first a getaway for the young couple and their four small children became a place that the whole extended family enjoyed, including aunts, uncles and cousins. A series of renovations and additions turned the small cabin into a large house, and those four children now have adult children of their own.
"The original matriarch and patriarch have died, and the trust they left for upkeep and maintenance is dwindling," recounts a Merrill viewpoint, "Who Gets the Beach House?," published this August, just as many families were enjoying their final summer days on the shore. "After years of exposure to the elements, the home needs a new roof, new siding and other major repairs. Yet those physical upgrades, while significant, are merely symbolic of much larger challenges facing a family that longed for the home to be as meaningful for subsequent generations as it had been for them. Who pays the bills? Who oversees the upkeep? Who gets to use the house, and when?"
For the Northern California family, one son had done particularly well financially. While it might seem that his good fortune solved the family's beach house preservation issues, it was only the beginning of a process that involved a meeting of siblings and their spouses plus nieces and nephews, featuring Allred as mediator.
"They didn't want to come in as 'deep pockets,'" Allred recalls of the son and his wife, who had asked her to help organize and run the meeting. "They wanted it to be collaborative. The biggest priority was maintaining family unity. They didn't expect preferential weeks in the home, or an extra vote on matters pertaining to the house."
For advisors who need to help their own clients resolve beach house estate planning issues, read on for a how-to from Merrill Lynch's Private Banking and Investment Group.
Working with the northern California couple's certified public accountant and estate attorney, Stacy Allred of Merrill Lynch's Private Banking and Investment Group helped coordinate a strategy to create a trust to cover major capital improvements, ongoing maintenance and taxes for the family beach house.
The technicalities of the transaction look like this: The trust was structured to receive gifts as "current" gifts, meaning that the recipients had the right to withdraw the gifts from the trust within a limited window and use them for their own purposes. Thus, the couple was able to use their annual gift tax exclusion to fund the trust without having to cut into their lifetime gift tax exemption limit. This is because the government allows each spouse annual tax-exempt gifts of up to $14,000 per individual recipient, so the brother and his wife together were able to give a total of $28,000 to each of 18 relatives, for a total of $500,000. The couple can repeat this process each year until the trust has reached a level capable of maintaining the home for decades to come.
While every family situation is unique, the case of the California compound highlights "a universal point about the intergenerational issues surrounding the family vacation home," according to the Merrill publication. "They should be handled with the same attention to detail you'd bestow on the succession of a family business."
The Essential Master Plan
Michael Liersch, director of behavioral finance for Bank of America Merrill Lynch, acknowledges that such a view may seem counterintuitive, since a family retreat is supposed to be about feeling good and letting go. "People tend to think that a place of relaxation and fun is a place without rules," Liersch says. "But a place of anxiety and uncertainty isn't fun, and that's what having no rules creates."
Liersch advises creating a "master plan" that includes an online calendar that extended family members spread across the country or around the world can access through a file-sharing application. "That way people can request times for the home, and everyone knows who's using the place and when," he says. "The calendar can include maintenance schedules and track routine expenses."
