Preserving the Family Cottage
In Northern Michigan, many attractive properties are owned by parents and grandparents that they would like to pass down to the younger generations. Without proper estate planning, the children may inherit a multitude of problems and the cottage may actually create frictions among the generation that the grandparents hoped would grow closer by having a northern haven to vacation in.
First, as difficult a process as it may be, the elder generation must first closely examine whether the younger generation wants to use the property into the future. While the parents’ generation remembers wonderful summers at the lake with their parents and perhaps grandparents, the younger generation may have limited vacation time with two parent working households, limited resources for upkeep of the cottage and may have settled too far away from northern Michigan to make use of the vacation home.
If it is decided that the northern Michigan home is to be a gift to future generations – several issues must be addressed.
The property can be held in joint ownership by the heirs, placed into a trust or placed into a Limited Liability Corporation (LLC). Each ownership has its pluses and minuses.
Joint Ownership. This would give each heir an undivided interest in the cottage. This could be done so that they can pass it down to their spouses and children (tenants in common) or it can be by survivorship so that the child who lives the longest ends up with the property (joint with the right of survivorship). This type of ownership does not address issues such as use, who pays the expenses and taxes, when and how the property can be sold. Additionally, a tenant in common can force a sale of the property or sell his or his ownership interest to a non-family member.
LLC. This is a popular option. Using an LLC, each heir has an interest in the corporate entity which in turn controls use of the property, who can either purchase or inherit ownership interests, how upkeep and taxes are paid and other operating issues, and the ability of the members to sell the property. The down side of this type of ownership is the fact that an LLC cannot claim the property as a homestead. Therefore, the LLC will certainly sustain a higher property tax assessment.
Trust. This option can address the use of the property, who can purchase or inherit ownership interests, issues of upkeep and taxes and the ability of the beneficiaries to sell the property. One beneficiary can claim the property as “homestead” if he or she occupies the property.
How will use of the property be allocated? Who will decide upon competing requests for vacation time at the property? Will there be a committee system or will all heirs meet annually to decide these issues? If an heir cannot use the property one year, can he or she lease the property for the allocated week and/or weekends?
These are the types of questions that arise when a family or group have an ownership interest in a cottage.
How will the taxes and upkeep be paid for? If the elder generation leaves money for these expenses, who will decide upon the level of upkeep? Some family members may want the cottage to be perfectly maintained and decorated. Others may feel that it is a place to sleep while on vacation fishing or boating. To them, a bare minimum of upkeep and decorating should be done.
If there are insufficient funds, who will pay and how will those costs be allocated? Not everyone will be in the same economic position. What if the taxes need to be paid but one or more of the family members either does not have the money to pay their share, or refuses to pay because he or she doesn’t get enough use of the cottage to justify the expenditure.
Who will be responsible for opening and closing the cottage? Putting in the dock? Cutting the lawn? Cleaning the cottage? The annual and monthly physical care of a property can become a huge roadblock for a peaceful enjoyment of a cottage.
It may be that several of the family members lives too far away to assist with the dock, the lawn and the cleaning. If this burden is to fall on the shoulders of one or two family members, what can they get in return?
If one of the children/heirs does not want to participate, can he or she sell the interest? If not, do they forfeit the interest? It is often the case that some family members want to have a cottage in Northern Michigan (or elsewhere) to vacation at. Otheres prefer to go to different vacation destinations each year. Some family members live too far away to make effective use of the property. Others are financially squeezed in affording their own home and car and are not able to accommodate the expense of another property. How shall this be handled? If they do not want to participate do they simply lose their share? or shall the others be forced to buy them out? Alternatively, may they sell their interest in the cottage to a third party?
If a majority of the children do not want to participate, can they sell the property? What percentage is required to sell the property? To whom can they sell? Spelling out the conditions for sale is very important. While the current owner may truly want the cottage to be passed down for generations, it may not be feasible. At what point can the family sell the cottage? Will it be if a majority want to sell?
Providing for future generations to use the family cottage is complex and has the potential for problems and conflicts. Proper estate planning, using the right legal tools, can provide for the smooth transition the elder generation’s dream into the family vacation home of the future.