The Importance of Personal Property

Today's blog examines an often overlooked part of estate planning. Clients often presume that their children will simply sort out personal property, without considering the potential pitfalls of leaving such decisions up to others. Including a Personal Property Memorandum as part of an estate plan is an excellent way to limit those issues. 

     One aspect of estate planning frequently overlooked by clients is the distribution of their tangible personal property. "Tangible personal property" includes all of the clients possessions that do not otherwise have a title or ownership designation. As part of our estate planning we use an Assignment to designate the Living Trust as the owner of all of these items. We also provide the client with the ability to leave a list of specific gift of tangible personal property.This Personal Property Memorandum may be changed at any time, without amending the Trust, and is read as part of the Trust after the client’s death. Unfortunately, when we bring this to the client’s attention, they often give it short shrift, indicating that they do not have anything of value or that they believe their children will not care about the personal property.

     Treating tangible personal property as an afterthought or unimportant is a common source of discord in the administration of a client’s estate or trust. Clients fail to account for the their loved ones attaching significant emotional value to items that lack significant monetary value. As an example, children may fight over which of them inherits their mother’s KitchenAid mixer because one of them has a strong emotional attachment to the mixture as a reminder of all the times he and his mother baked together for the holidays, while the client’s daughter simply would like a mixer for her own home. It never occurs to either sibling to explain to the other why they place such a high value on their mother’s mixer, thus resulting in misunderstandings and hurt feelings.

     Whenever our clients indicate that they feel their tangible personal property is not significant in their estate planning we encourage them to take time to sit down with their loved ones and discuss which items may hold emotional significance. This conversation, as much as any other conversation, can alleviate surprises and problems after the client’s death. In addition, it allows the client and their loved ones to begin a discussion about what will happen after the client’s death without focusing on difficult matters to discuss, such as illness and the money. Not only do clients gain a better understanding of what their children value, they also have the ability to limit any unnecessary conflict that otherwise might have arisen after their death.

     Tangible personal property often carries the most emotional significance to a client’s loved ones after their death. For a client concerned about maintaining familial harmony and ensuring the smooth administration of their estate, taking time to prepare a personal property memorandum can significantly reduce the chance of problems after their death. 

     It is important to remember that while the personal property memorandum is a common tool in estate planning is not universally included in every document. Different documents will treat the memorandum differently, some give it different priority from the other terms of the trust, and some trusts omit this option entirely. Clients should consult an experienced professional to determine under what terms they can make use of a memorandum in their planning.

Keeping Family Vacation Homes in the Family

A warm day like yesterday often triggers thoughts of summer and good times at the family cottage. With these thoughts in mind, clients often wonder how to structure the transfer of ownership of a family vacation home to their children and grandchildren either during lifetime or at death.

     Gifting or bequeathing a family vacation home is not an easy matter and requires significant planning in order to treat all family members fairly. Clients need to balance their desire to make a well-intentioned gift with the possible unintended burden on beneficiaries, which may cause strife among loved ones. Additionally, the transfer of such high-value assets brings with it potential estate and gift tax implications. While a client certainly must consider tax issues and the possibility of an increase in property taxes because of the transfer, we will leave these for another time and focus primarily on the family issues. 

     While a parent may hope that common ownership of a vacation home will keep their family together, it is entirely possible that not all of their children have the same warm memories of summers at the lake. In addition, those children’s spouses and children may have different ideas on how to spend family vacations. Add to all of this the fact that many adult children have moved away to pursue their careers (or avoid sometimes harsh Michigan winters) and may not be able to enjoy the use of a vacation home. It is important to discuss these issues with all of the family members to determine which children are interested in owning a part of the "family cottage".

     While there is not enough time to discuss all of the issues, important points to consider when transferring the vacation home include:

• What will the ownership structure be? This could include ownership jointly, as tenants-in-common, by a trust, or by an LLC?
• Who will manage the property? Family dynamics are important - not all of the family members may want to get involved in the day-to-day decisions.
• How will use of the vacation home be determined?  A plan should be in place for fairly selecting weeks of use for each of the family members.
• How are repairs and improvements, including cost, dealt with? Some family members may always be looking to upgrade the facilities while others may be happy to keep things simple and inexpensive.
• Should there be rules about allowing guests to use the cottage, especially without a family member present?  Allowing many non-family guests to use the cottage can cause considerable wear and tear on it and create friction among family members.
• Is there a procedure for allowing a family member to sell or gift the ownership interest?  Either during lifetime or at death, family members often desire to transfer their interest to a spouse, or children. If not planned for, this can result in a significant fractionating of a family member's interest and increasing the total number of "owners" for purposes of use and expenses. It might also result in pieces of the vacation home being owned outside the intended family.

     While continuing family ownership of vacation property is a laudable goal, much thought should be put into the process to make sure that the intended result of family harmony does not actually result in disharmony. As with any other tax or gift planning strategy is important to understand each client individual circumstances and consult with their professionals to ensure that the planning will not have unforeseen consequences.