Keeping Peace — and Your Property — in the Family

If you own a vacation home, you and your family probably have shared countless good times there over the years. So it may be difficult to imagine that your joy-filled vacation home could become a source of family friction after your death. But disagreements over scheduling, expenses, use, and a host of other issues can cause ill feelings and even estrangement when family members become co-owners under traditional forms of ownership.

Prevent Disputes with an LLC

Creating a limited liability company (LLC) to own your vacation home could help avoid problems in the future. The LLC’s operating agreement can outline rules for the use and transfer of the property. It can create an annual budget process and address decision making regarding maintenance and improvements. The agreement can also give family members a right of first refusal before an interest can be transferred to someone outside the family.

It’s Up to You

Typically, the original owners establish the LLC with input from family members on the operating agreement terms. Your tax advisor can discuss the estate- and gift-tax advantages of various transfer methods.

When the “Homeowner” Is an LLC

Owning a vacation home through an LLC offers these advantages:

Keeps the home in the family by preventing the unilateral sale of a family member’s interest

Limits the family’s exposure to lawsuits by guests and creditors because the LLC owns the property

Establishes rules for sharing property expenses, scheduling occupancy, and resolving disputes

Creates an entity to hold operating funds and report the division of income and expenses among owners for tax purposes

The Mutual Fund Dilemma

When it comes to deciding between an actively managed mutual fund and an index fund, there’s no right or wrong choice. As with any investment, the fund type you choose typically will depend on your risk tolerance, targeted allocation, and the role you expect the fund to play in your portfolio. Reviewing your objectives can help you make a decision.

In the Active Camp

If your long-term objective is to outperform the markets, actively managed funds may be for you. An active fund manager buys and sells investments with the goal of generating returns that beat a comparable benchmark index. Keep in mind that actively managed funds generally have higher trading costs than index funds, a factor to consider in assessing performance relative to a benchmark. These funds

 

may be best held in tax-advantaged accounts, since their trading activity can lead to capital gains distributions.

The Passive Approach

Index funds may be the right choice if tracking overall market returns is your objective and

you don’t have the time or the interest to research and monitor actively managed funds. Since index funds change investment holdings relatively infrequently, they generally have relatively low expenses and a smaller tax bite.

What To Consider

Before you buy an actively managed fund, evaluate it by vetting its managers.

Long-term performance. Research the manager’s performance in a variety of markets. While there are no guarantees for the future, above-average long-term performance is a sign of the manager’s skill and success.

Strategy. The manager should have a clear and well-defined strategy for buying and selling investments. Check the fund’s prospectus to make sure you understand and agree with the approach.

Team effort. The fund’s prospectus will tell you the names of the portfolio managers and how long they’ve been with a fund. Longer is generally better.