Keeping it in the family: A guide to retaining a legacy property across generations

For many families, a cherished piece of real estate — often a beloved vacation home — represents far more than a physical property. It can be the gathering place for the family, where precious memories have been made, and can be an important part of the family’s identity. The desire to pass that property down through multiple generations is one we encounter regularly with our clients. However, turning that desire into a reality requires thoughtful, proactive planning. Below, we walk through some key steps families should consider when they plan for their legacy real estate, concluding with a real-world example that may feel very familiar to your own circumstances.

1. Choose the right ownership structure

An important place to begin is to consider what structure will best serve the family’s goals. Two commonly used structures are a trust and a limited liability company (LLC).

Trust: A trust can be a good option when the goal is to benefit multiple individuals across multiple generations. Some advantages include:

• Estate tax efficiency: A properly structured trust can help keep the value of the property out of the taxable estates of your beneficiaries, often for many generations.
• Centralized management: A trust designates a trustee who is responsible for managing the property, including handling transactions with third parties (contractors, property managers, tenants).
• Built-in governance: Trust provisions can address how the property is managed, how use is shared among family members, and how ownership eventually transitions or ends

LLC: An LLC can be particularly well-suited when the property is (or will be) rented to third parties or when liability protection is a priority. Some advantages include:

• Liability protection: Claims related to the property are generally limited to the value of the LLC, shielding the family’s broader assets.
• Designated management: Like a trust, an LLC can designate one or more individuals — here, a manager — to manage the property and to handle day-to-day interactions with third parties.
• Customizable governance: The LLC’s operating agreement can define roles and responsibilities, restrict ownership transfers to keep the property within the family, and be updated over time as the family grows and circumstances change.

2. Account for ongoing expenses

Regardless of which ownership structure is chosen, the property will have ongoing “carrying costs.” This can include property taxes, insurance, maintenance, utilities, repairs, and more. Planning for how these expenses will be paid is essential.

Options to consider include:

• Endow the property: When gifting the property, you can also make a gift of funds that are dedicated to pay the carrying costs over time.
• Make the property productive: If no endowment exists, or if it is ever depleted, consider whether the property can be rented in order to generate the necessary funds to pay the ongoing carrying costs and whether your beneficiaries would want to take on the added responsibilities associated with renting the property.
• Require beneficiaries to contribute: Another option is for the owners (your beneficiaries) to pay these expenses. In this case, consider whether they are willing (or able) to pay these carrying costs. If there are multiple beneficiaries, also consider what might happen if one of them refuses to pay their fair share. Finally, it is important to note that if the owners will need to cover the carrying costs, that could impact the structure that you want to use in making the gift (maybe an LLC instead of a trust) which can also impact your beneficiaries from an estate tax perspective.

If there is no way to pay the carrying costs, the property may need to be sold.

3. Consider the details

Once the ownership structure is in place, the real work begins. As any experienced advisor will tell you, the devil is truly in the details. Some of these details are particularly challenging to resolve when you are planning today for what family dynamics might look like decades from now.

What starts as a manageable arrangement between parents and children can quickly become complex when you add spouses, grandchildren, their families, and future generations. Suddenly, questions of fairness, equal access, and shared responsibility become much harder to answer. The governing agreement — whether a trust document or an LLC operating agreement — must be detailed enough to provide real guidance, yet flexible enough to evolve with the family.

Here are some points you may want to consider in crafting these governing documents:

Use of the property

• Division of time: How are weeks or seasons allocated among family members? A lottery system may be one fair and transparent approach. A point system may be another.
• Priority and scheduling: Who has first choice of dates, and how are conflicts resolved?
• Occupancy limits: Are there limits on how many people can use the property at one time?
• Rental to family members: If one family member uses the property significantly more than others, should they be required to pay rent to the group?
• Third-party rentals: If the property is rented to outside parties, who manages that process and how is rental income distributed?

Decisions related to the property

• Routine maintenance: Who is responsible for overseeing day-to-day upkeep, arranging contractors, and paying ordinary expenses?
• Major renovations: For significant improvements, you may want to require broader consensus, such as input from all owners or a supermajority vote.
• Manager rotation: Consider rotating management responsibilities among family members on a set schedule (e.g., every few years) to distribute the burden and maintain engagement.

Mechanisms for resolving disagreements

Even the best-planned arrangements will encounter disagreements. Consider including one or more strategies to help resolve disputes before they become problematic. The trustee or the manager could be responsible for resolving disputes. Another option could be to form a committee of owners that meets regularly to evaluate and settle disputes. The agreement could also provide for arbitration if other resolution mechanisms fail.

4. Plan for the end of shared ownership

While many original owners envision the property passing seamlessly from generation to generation, the reality can be quite different — particularly as the family grows larger and more dispersed. The more generations that are involved, the more people there are who may or may not know each other well, and the less likely it is that all of them will share the same emotional connection to the property. Planning for an eventual exit is not pessimistic; it is prudent.

Right of first refusal (ROFR): A right of first refusal gives existing owners the opportunity to purchase a departing owner’s interest before it is offered to outside parties. If you would like to include a ROFR also consider:

• Whether the ROFR should be offered at full market value or at a discount; and
• What the timeline for exercising the ROFR should be.

Property valuation: If one or more owners are exiting, the value of their interest will need to be determined. This can be done by obtaining an appraisal, but there are also options at this stage. If all parties can agree on one independent appraiser to determine value, that appraisal can be binding. Otherwise, consider whether

• Each party obtains their own appraisal and the average is used; or
• Each party’s appraiser jointly selects a neutral third appraiser whose value is binding.

Third-party sale: The decision to sell is not always an easy one. You can simplify this decision for your beneficiaries by planning in advance who will have the authority to decide whether the property should be sold. Consider whether this should be by majority or unanimous vote. Building these mechanisms into the governing agreement from the outset can help avoid costly and emotionally charged disputes down the road.

5. A Real-World Example

To illustrate how these principles come together in practice, consider a family with four adult children who held a lake property through an LLC. Their LLC operating agreement addressed the full lifecycle of shared ownership:

• Management: A manager was designated to handle ordinary expenses, contractor oversight, and seasonal rentals. The children opted to rotate this role every few years.
• Major decisions: Renovations or a potential sale required input from all four children, with a dispute resolution process (committee, then arbitration) built in. This came into play when one child wanted to renovate the kitchen. As the other three children did not want to spend the funds for this, the committee system effectively resolved the question, and the kitchen was not renovated.
• Scheduling: A lottery system allocated weeks at the property. Each year the siblings got together to take turns choosing their preferred time at the lake property. This allowed them to rotate who got to select their preferred weeks for the year (such as the week of the Fourth of July or Labor Day).
• Exit planning: A right of first refusal allowed any child to purchase the property before it went to market, along with a clear valuation methodology.

Ultimately, the cost of upkeep led this family to sell the property. Because the agreement had anticipated that outcome and provided a clear process, the sale proceeded smoothly and without family conflict.

Conclusion

A legacy property is a deeply personal aspiration, and with the right planning, you can create a structure to help manage this goal. The families who succeed are those who have the difficult conversations early, document their decisions thoroughly, and build enough flexibility into their structure to adapt as circumstances change.

Your CIBC Private Wealth advisor, working alongside your legal and tax counsel, can help ensure that your vision for the property — and for your family — endures for generations to come.