When a family purchases a vacation home, location and size are often the key factors in decision-making. But there’s another critical consideration that should not be overlooked: the ownership structure. Whether you are an owner or an advisor to a family, understanding the advantages and disadvantages of each ownership structure is the key to making an informed decision. This blog outlines each type of entity and why many families choose to combine an LLC with a trust.
Why ownership structure matters
Vacation homes, especially high-value properties, require careful structuring because of their implications for the family’s financial goals and estate planning.
The ownership structure impacts a vacation home’s management, tax considerations, and other matters, including:
- Asset and creditor protection
- Estate and gift planning
- Sale of ownership interests to non-family members
- Income and expense allocation and record keeping
- Intrafamily ownership transfers
- Family asset preservation
This makes it essential to thoroughly weigh the pros and cons of each ownership structure before making a decision.
Types of ownership structures
Before diving into the structure that most often benefits vacation homeowners, let’s explain the various types of ownership and their advantages and disadvantages.
Direct ownership
Direct ownership, the simplest structure, means one or more people hold the title to the home in their own names. The benefit of direct ownership is its ease, with no entity setup, minimal ongoing administration, and straightforward financing.
However, for wealthy families, direct ownership offers limited asset protection and may expose the property to probate, marital division in a divorce, or creditor claims. It also restricts flexibility around tax planning, multi‑generational transfers, and usage, making it impractical for long‑term legacy planning.
Tenants in common (TIC)
Under a TIC structure, each owner holds a defined, undivided interest in the property. The main benefit is flexibility because owners can hold unequal shares, sell or transfer their interest, and adjust ownership percentages to reflect their contributions.
TICs can work well if a few adults are sharing a vacation home for a short time, but this is not typically the case for high-net-worth families. This structure could lead to disagreements about using the house, how maintenance is handled, or when (and how) to sell or buy someone out. Plus, TICs don’t offer any probate benefits and lack liability protection, which is a major downside for luxury homes where the risks are higher due to their amenities.
S-corps or C-corps
Some families consider holding a vacation home in a corporation, but this structure is generally not beneficial and can be a burden. While a corporation provides liability protection and well-defined management, the major drawbacks often outweigh the benefits. Corporate ownership can trigger double taxation (in the case of C‑corps), limit flexibility in transferring shares across generations, and complicate distributions when family members use the home personally. For high‑net‑worth households, the lack of tax advantages and the corporate formalities usually make corporations the least desirable option for vacation property ownership structure.
Trust
A trust is a go-to for many families because it can hold title to a vacation home to offer privacy, avoid probate, and maintain strict control over who can inherit or use the property. Probate tends to be challenging and expensive, which is why many owners choose a structure that avoids it. Trusts are especially valuable for those who want to make sure the home stays in the family, protect it during a divorce, or centralize long‑term decision‑making.
Trusts can work hand-in-hand with an overall estate plan, helping protect your assets (depending on the type of trust) and keeping things running smoothly if something happens to the original owner.
LLC
Structuring vacation home ownership as an LLC is highly beneficial in many cases because it limits the family’s exposure to personal liability lawsuits associated with the property (with some exceptions). This includes lawsuits brought on by any visitors or workers injured at the home or creditors that supply goods or services to the LLC.
For example, if a person slips while walking on your beach house’s pool deck and suffers a head injury, they could sue and receive a six-figure settlement. However, with an LLC, your personal exposure could be limited to the vacation home itself, protecting other assets and investments.
Avoiding probate is a major benefit. If the vacation owner dies and the home is owned outright rather than through an LLC, the estate would be subject to probate, which can be time-consuming and potentially costly for heirs, especially if the property is in a different state than the one they live in. This could mean more legal proceedings and delays in transferring ownership.
To keep the vacation home in the family, transfer restrictions could be included in the LLC’s operating agreement to prevent co-owners from selling their interest in the home to non-family members. Restrictions also can be placed on selling ownership interests to owners’ former spouses, the use of the home by non-family members, and transfers of ownership interest among family members.
Plus, with an LLC, the heirs would be eligible for a step-up in cost basis to the home’s fair market value upon the owner’s death, just as they would if the property had been owned outright. The increased basis can reduce capital gains taxes when the home is sold.
Another advantage of an LLC is that it can simplify bookkeeping. Because it is its own separate entity, it can hold operating funds for the home. This allows ownership and operating expenses to be allocated in proportion to each person’s use of the home and payment of expenses. Choosing an LLC for a home used as a vacation rental also means any rental income can be easily divided among family members.
Finally, since ownership interests in an LLC represent the personal property of family members, intrafamily transfers of these interests don’t involve the conveyance of real property. That means these transfers won’t result in real property transfer taxes and fees or affect title insurance policies and rights.
Unique challenges for wealthy families
Choosing the right setup is especially important for high-net-worth families for a variety of reasons. First, they tend to buy vacation residences in different states or countries than where they live, which can lead to complications in the case of their death. These families also encounter increased liability risks because of the luxury amenities their homes often have. Lastly, many affluent households value their privacy when making home purchases, and they need to choose a structure that offers them that.
Why an LLC with a trust offers the best overall protection
Combining an LLC with a trust offers a strategic blend of benefits that can address many of the challenges associated with vacation home ownership. By holding the property in an LLC, families can limit personal liability, streamline management and expense allocation, and avoid complications like probate. The LLC structure also allows for flexible transfer of ownership interests among family members while minimizing taxes and administrative hurdles that often come with real property transfers.
When a trust is added to the equation, it adds privacy and offers a clear plan for succession, ensuring that the property remains in the family according to the owner’s wishes. The trust can direct how LLC interests are transferred, help avoid public probate proceedings, and protect the family’s assets from potential disputes or creditors. This combination not only preserves the family's legacy but also simplifies future decisions for heirs, making it easier to manage or eventually sell the property if necessary.
Structuring ownership through both an LLC and a trust is often the most practical and comprehensive solution for families seeking to protect their assets, maintain peace within the family, and ensure a smooth transition to the next generation.
When it makes sense to choose another structure
In some circumstances, it would make sense to choose a structure other than LLC with a trust. These cases include:
- Short-term shared ownership (TIC): If you only plan to hold the property for a short period, setting up an LLC and a trust may not be worth the time and cost.
- Owners seeking simplicity: Direct ownership is ideal if you prefer a straightforward arrangement.
- Properties used as corporate benefits: If the vacation home is owned by a business and used as a perk for executives or company retreats, the structure should be treated as a corporation.
The details of vacation home ownership can be complex. Ready to protect your family’s vacation home? Contact our private client advisors today to explore the best ownership structure for your unique situation.