Your holiday house – perhaps by the beach or perhaps in the country – is filled with fond memories of long weekend and summer getaways. It is an escape from the daily grind where, surrounded by your children, grandchildren, and extended family, you make special memories and reconnect. It’s natural that you want your family to continue to enjoy such times together even after you are gone, but is it possible to leave the holiday house to your family on the condition that it continue to be used by future generations just as it always has been? And, if it is possible, is it a good idea?
Can you leave your holiday house to your family?
The short answer is, yes.
Direct gifting
One way to do this is to leave the house directly to your children as tenants-in-common or joint tenants. You may wish to make the gift on the condition that it be used or dealt with in a particular way or merely express your wishes in the form of a letter.
As tenants-in-common, each child will own a fixed interest in the property that can be dealt with independently – for example, a fixed interest can be sold or passed to a co-owner’s own family and friends in a Will. If, however, your children own the property as joint tenants, upon the death of each co-owner, the surviving owner or owners receives an increased ‘share’. Since, the deceased co-owner’s share does not pass through their Will as part of their personal estate, the last surviving co-owner will end up with the whole property. Further, if one of the co-owners wishes to sell their ‘share’ or deal with it in their Will, they cannot do so without severing the joint tenancy or forcing a sale. How easy this is, depends on whether the other co-owners are on board with the idea.
Something else to consider is the vulnerability of these forms of co-ownership to claims by third parties, for example creditors or ex-spouses.
If a co-owner is declared bankrupt and the property is owned as tenants-in-common, the bankrupt co-owner’s interest in the property may become the property of the trustee in bankruptcy and sold. If a bankrupt and non-bankrupt co-owner own a property as joint tenants, the joint tenancy is severed upon bankruptcy and the bankrupt co-owner’s share of the property may be sold.
If the marriage or de facto relationship of one of the co-owners breaks down then however, that co-owner’s interest or share in the property is held, it may be deemed to be part of their marital pool of assets that will be subject to a family court order. This may see the property being sold or even partly owned by an ex-in law!
Testamentary Trusts
Another way to pass on your property to your family is to establish a testamentary trust in your Will to hold the house for the benefit of your children and future generations. Rather than repeating ourselves, find out more about testamentary trusts here:
- What is a Testamentary Trust and why would I need one?
- Yes, you do need a testamentary trust
- Why use a testamentary trust in your Will?
Essentially, a testamentary trust is a ‘family trust’ or ‘discretionary trust’, the terms of which are established in your Will. Instead of your children owning the property in their own names, the trust will own the property with your children and successive generations having the benefit of the property, for example, the use of, or income generated by, the property.
This strategy is preferable to leaving a holiday house to your children outright for the following reasons:
- If your intention is for the holiday house to stay in the family for generations, you don’t have to worry about the terms of your children’s own Wills. Succession planning for the property is automatically built into the terms of the testamentary trust;
- Testamentary trusts last for at least 80 years;
- You can choose who will control the testamentary trust;
- A testamentary trust offers a layer of asset protection against claims by third parties. For example, if one of your children becomes a bankrupt, a trust, being a separate legal entity, will protect the holiday home from a creditor’s claims. If one of your children separates from their partner, the property is less likely to be dragged into family law proceedings than if you left the property to your children outright, since the property is intended to benefit multiple generations of the family not just the separating child;
- There will be no CGT or stamp duty triggered when the property moves into the testamentary trust that is set up in accordance with the Will. Your own cost base will ‘roll over’ to the testamentary trust; and
- If you choose to have a company trustee for the testamentary trust, it is easy for your family members to change control of the trustee by changing the directors of the company, without the need to transfer the title of the property.
One drawback of leaving a holiday house in a testamentary trust is that the land tax liability for the holiday house will generally be greater than if it was held by one or more of your children directly.
Should you leave your holiday house to your family?
So, while you certainly can leave your holiday house to your family, should you do so?
When thinking how to deal with your holiday house as part of your estate planning, a good starting point is to talk to your children. Do they want the property? Try not to confuse your emotional ties to the property with your children’s feelings about the property. You might be surprised to find that they are not as interested in using the holiday house once you are no longer there to share it with them.
If they do want the property, can your children afford it? Holiday homes can be expensive to maintain, and many don’t generate any income. Are you able to leave a lump cash sum in the testamentary trust along with the holiday house to assist your children with the ongoing payment of outgoings and expenses?
Another important issue to consider and discuss with your children is whether they will cooperate as co-owners. Sometimes, family members who inherit a house together do not agree on what to do with it – one person may want to sell, and another want to keep it, or one person can’t afford the maintenance and another wants to put in a new hot water system, or certain family members may be using it to the exclusion of the others. Even a decision about whether to update the sofa can be a source of conflict if one person wants to keep it for reasons of nostalgia and another wants to update the décor.
To avoid issues between family members, it is a good idea to make it a condition of the testamentary trust that those family members who wish to use the holiday house enter a ‘property use deed’ or ‘co-ownership agreement’, setting out matters such as:
- How disputes will be handled between family members with respect to the house (for example, if one child wants to sell the property and the others don’t);
- How maintenance costs and expenses will be paid and by whom;
- How time at the holiday house will be scheduled between family members; and
- Whether the holiday house can be rented out to cover expenses.
I want to leave my holiday house to my family. What do I do now?
We want to help you. Whether you need to update your existing estate planning documents to make provision for your holiday house, or prepare them for the first time, contact us on 1300 654 590 or send us an email. We will prepare estate planning documents that are tailored specifically to you and your family and ensure that the process is as stress-free as possible.
The information contained in this post is current at the date of editing – 14 July 2023.