Plan, talk before passing vacation homes to heirs

Your home — and even maybe your vacation home — can be a large share of your worth. When it comes to calculating the size of your retirement nest egg, the value of your property may be no yolk. (OK, that was a bad pun.)

As workers near retirement age, they tend to view all of their property as part of their retirement savings calculations.

I have had many conversations with clients about their property and how it affects their retirement plans. The scenario that I will describe is based on these conversations and uses an imaginary couple to illustrate some of the retirement planning considerations.

I will call the couple Jim, who works for a local government agency, and Barbara, a teacher. When they retire, they both will have public pensions. Despite putting adult children through college, they also will have managed to save a “respectable” amount for retirement.

Likely, Jim and Barbara own a home in a nice Bakersfield neighborhood, where property values have not appreciated considerably. If they are lucky, the value of their home, which significantly slumped during the Great Recession, has basically recovered. When they retire, the couple can be expected to eventually sell the house and use the proceeds to “downsize” — maybe move into a gated, age-restricted community.

In this scenario, the challenge for the couple will be deciding what to do with their vacation house. The central coast is very popular with my clients. I know that aging boomers who purchased, say, a two-bedroom, two-bath beachfront “cottage” in Cayucos in the 1970s for $70,000, will find it is now worth about $3 million after four decades of improvements and skyrocketing coastal values.

It is conceivable that my imaginary couple’s retirement nest egg will include at least $500,000 in traditional savings, plus their two pensions and the $3 million on the ground in Cayucos. But they are “paper millionaires,” because the value of the beachfront home is not “liquid.” It can’t quickly be spent to pay medical expenses, the increased living costs that come with growing old, nor long-term health care, which someday may be needed.

And then there is the practical question: What will become of the vacation house when the owners die?

When I ask that question, often my clients with vacation homes will provide a simple response: We’ll give the house to the kids.

But that’s not as simple as it sounds.

Using the scenario I provided, maybe Jim and Barbara’s son, who lives in California, will want the house. But their other children, who live out of state, may be not interested. Perhaps they won’t be able to pay maintenance costs. Perhaps they live too far away to use it.

When deciding the disposition of property — especially long-cherished family vacation homes — a good, frank family discussion is required. Like most aspects of retirement and estate planning, it is important to involve those who will be affected. It is important to seek input from people — especially adult children and heirs — who may become involved in assisting you through the often challenging “golden years.”

Helping retirees — or soon-to-be retirees — develop retirement savings and estate plans, especially when these plans involve property or complicated assets, is a “team effort.” Members of the team should include financial planners, lawyers and accountants. The goal should be to help retirees realize the highest value of their assets, while minimizing tax implications.

In the scenario I described, the first step should be for the couple to ask their children what they want to happen to the Cayucos house. Do they want to keep it? Sell it? Turn it into income property?

Working from there, the couple can designate their other assets to equalize their estate to compensate children, who may not be interested or cannot afford to retain ownership in the house.

There also are legal instruments — trusts and “qualified personal residence trusts” — which might allow the couple upon retirement to move their residence to the Cayucos house and pay their children rent. Under some circumstances, this arrangement may be beneficial.

All good retirement and estate plans are based on solid research and multifaceted, competent advice. The process should begin with frank discussions among family members.