Q: My husband and I recently took a vacation to Mexico. While there, we attended a presentation for a vacation club. We didn’t buy, but the presentation sounded good and we have been thinking about going back. Are vacation clubs a good deal?
A: The vacation club is just another version of the more familiar timeshare concept. Before you buy a membership in a vacation club or a timeshare, do yourself a favor and take a timeout. There is a lot you need to consider before making such a purchase.
First of all, do not be fooled into believing that a timeshare is an investment. You can get a sense of what I mean by looking on eBay. Hundreds of timeshares are listed for sale, many for as little as one dollar. All the listings, even those for some very high-end resort names, are available for a fraction of their original selling price.
Timeshare ownership entails significant ongoing financial commitments, including annual maintenance fees, property taxes and special assessments. These costs add up. For example, if your annual maintenance fee is $900 and your property taxes are $150, that week in paradise will cost you $150 per night every year. It would be wise to ask yourself if $150 per night is a good enough deal, relative to other vacation options, to make it worth locking yourself into an annual maintenance fee.
Maintenance fee inflation can be a significant problem. Between 2005 and 2012 (the most recent data I could find), maintenance fees grew at an average annual rate of 5 percent. If that rate continues, your maintenance fee will double in 15 years. What may seem like a relatively small fee today can grow to become a serious burden over time.
Maintenance fees are relentless. Timeshare owners soon discover that the old saying about death and taxes also applies to timeshare maintenance fees—only more so. Death will relieve you of some taxes, but it will not relieve your estate or your heirs from timeshare maintenance fees. As soon as you buy a timeshare (or inherit one), you are obligated to pay maintenance fees and any other assessment levied by the board of directors. This obligation continues as long as you own the timeshare, whether you use the timeshare or not.
Dying with a timeshare in your estate can give rise to some complications. Leaving your timeshare to your heirs means you also bequeath to them the obligation to pay the annual maintenance fees. An heir can disclaim the inheritance, but the estate is still liable for the maintenance fees. Since the executor of an estate is responsible to pay all claims on an estate before a final distribution of the assets, settling the estate may be drawn out until the disclaimed timeshare can be sold or given away. With these complications in mind, if you have a timeshare in your estate, you may want to have a conversation with your heirs regarding how inheriting the timeshare might complicate their lives.
While timeshare ownership may seem like an attractive way to buy into a vacation property, there are many potential pitfalls with timeshare ownership. Take the time to learn what you are getting into before you buy.
Steven C. MerrellMBA, CFP®, AIF® is a Partner at Monterey Private Wealth, Inc., a Wealth Management Firm in Monterey. He welcomes questions that you may have concerning investments, taxes, retirement, or estate planning. Send your questions to: Steve Merrell, 2340 Garden Road Suite 202, Monterey, CA93940 or email them to firstname.lastname@example.org.