Attorney & Mediator
Attorney & Mediator

  Cottage Trust – Is this the answer for your family?  Part 4

We’ve examined all of the concerns and problems associated with a Family Cottage Trust in Parts One, Two and Three.  What are the steps necessary to decide whether this is right for your family?

 

First:  Family Meeting

While you may think this is a great idea, the best practice is to gather the family for a meeting and discuss the concept.  Find out how many children are interested in keeping the cottage.

If there is interest, then begin to examine all of the “problem” areas.  Have the children discuss how they would administer the use of the cottage.  Are they willing to commit their time to its upkeep?  Their money for its care?

 

Next: Draft the Use Agreement

Can they draft up a set of rules upon which they can agree for the use of the cottage.  If they cannot agree on the rule, it is a sure bet that they will not be able to use the cottage without it becoming a source of anger and discontentment instead of a joy.

If they are able to work through the issues previously set forth, then it is time to set the agreement in writing – have them all sign it.

 

Last:  Amend your Estate Plan

Now it is time to incorporate the cottage plan into your estate plan.  Have your trust direct the trustee to distribute the cottage to an LLC at the time of your death and to have the signed agreement for its use be a part of the Organizational Agreement.

This will not be a quick process.  It will take the children time to decide what they can live with and what they cannot.  There will be (hopefully) minor disagreements which cannot be avoided.  Remember that you are still here to help mediate these disputes and bring them together for the common good.

Cottage Trust – Is this the answer for your family?  Part 3

We have examined a number of issues concerning the financing and use of the property.  It is now time to address the legal L.L.C. issues that will be put into the Operating Agreement.

If the ownership interests are distributed equally among the grantor’s children, what happens when those children pass away?  Can the membership interests only pass to blood relatives – children?  Can a person leave the interest to his or her spouse?

If one of the children no longer wants to be part of the L.L.C., what is the mechanism to handle that?  Are the other children forced to purchase his/her shares?  Could the shares be sold to individuals other than family?

If a child dies, are his/her shares passed on to his/her children?  Can the spouse have any interest in the shares?

If there are mandatory buy-out provisions, how would these be funded?

Should provision be made for ownership by grandchildren of the grantor?  Is that too far in the future to worry about?

At first, it sounds like such a romantic idea for the family cottage to be passed on for many years to many generations; however, there are practical difficulties.  It may be difficult enough for adult siblings to get along and cooperate with a family Cottage.  It will be far more difficult with the next generation.  Also, there will be more of them.  If each child has two children, that is twice as many individuals to accommodate.  There may not be enough weeks in a summer to go around.

There is often the situation where one of the grantor’s children does not have any children.  If the shares are to be passed on only to grandchildren (blood relatives), it means that those without children lose a piece of their inheritance as they cannot pass it on.

 

Disagreements

There will be disagreements – that’s a guarantee.  Each individual will see the cottage as something different.

Some will see it as a place where they can kick back and relax – do some fishing and swimming – no concerns.  Others will treasure it as a holder of their memories – a place to be preserved and cared for.

How should these disagreements be handled?  What will the process be?

 

Ultimate sale.

All good things come to an end.  At some point in the future, the family members will no longer want to own the cottage.  There must be a practical and fair manner to come to that decision.

When can the property be sold?  Will it require a unanimous agreement? Or a majority or super-majority agreement?

Cottage Trust- Is this the answer for your family? Part 2

We previously addressed the issues of Management generally and of Budgeting for the family cottage.  We will now address some other issues that must be considered.

 

Scheduling Use of the Cottage:

While money squabbles are disruptive, scheduling the use of the cottage may well be the real hot button topic.

In northern Michigan, there are only 12 – 14 good summer vacation weeks available.  Clearly, not everyone can have the week of July 4th.   Depending on the number of children that you have, it may be impossible to accommodate everyone’s desires and schedules.

What is the mechanism for deciding on the use of the cottage?  Should preferences be rotated?  Should family members share the prime weeks (presuming that the property is large enough)?

Once the weeks have been assigned, another question is whether people may bring friends with them to the cottage.  If so, how many at one time?

 

Getting it Ready and Keeping it Clean

How will the cottage get opened for the season and how will it be closed?  Is that the job of the first and last to use it?  Or is this a job that should be assigned annually?  Much of this may depend on where your children live.  It isn’t practical to expect someone who lives in California to come to Northern Michigan for a weekend simply to shut the cottage down.  On the other hand, it is not fair to make this the responsibility of the kids that live nearby every year.

What will the rule be concerning clean-up after use?  Everyone likes a clean and tidy place when they arrive.  There must be a mechanism to assure that this is the case for each of the children when it comes time for his or her use.

Will the cleaning be done by contracting with a third party for cleaning and lawn services?  Is that type of expenditure in the budget?  If it is not affordable, will the children want to use part of their vacation week cutting the grass, washing the windows and cleaning the cottage when they are getting ready to leave?

 

Renting out the Cottage

If one or more the children cannot use the cottage on his/her week(s) in a year, should it be rented out?

If the answer is yes, should it only be rented to individuals that are known to the family?  Or to anyone?

Should the rental income be put into the general fund to pay for taxes, expenses, etc., or should the individual who is not using the property be given a portion of the rental?

Cottage Trusts – Is this the answer for your family? Part 1

Northern Michigan is a beautiful place – lots of waterfront homes and vacation retreats.  Many families look for ways to keep their properties in the family to benefit their children and grandchildren.

 

Is a Cottage Trust right for your family?

First, vacation properties are often placed into a family L.L.C. (Limited Liability Company) instead of an irrevocable trust.  The L.L.C. will have an Operating Agreement which will bind the future members and it can set out the rules of ownership.

If the property has been in the family for a long period of time, it may not be a good idea to transfer the real property during the lifetime of the owners as the property taxes would uncap – leaving the current owners with a higher tax burden than they now have.

If the property is transferred to an L.L.C. upon the death of the owners, the property taxes will, however, uncap upon the transfer to the L.L.C.  If the property were left instead directly to the children as joint tenants, the property taxes would not uncap.  This often is not practical for families with more than two or three children.  It may be better to forego property tax savings in order to have the structure necessary to guide the ownership of the property.

 

What are some concerns and discussion points that should be addressed prior to heading down this road?

Management of the Cottage:

Will the Cottage LLC be member managed, thereby giving each child equal input into the use and upkeep of the property? Or will it be manager managed, making one of the children the ultimate manager?

If your children have difficulty getting along, it may be unrealistic to believe that they will do so after you are no longer here to mediate.  Property ownership and management can be difficult when it is among small numbers of people who get along well.  It may be impossible with a larger number of people who are always at odds.

Should the management of the Cottage be broken into different jobs such as Operations/Maintenance Manager, Record Keeping/Scheduling Manager and Financial Manager?  This would give different family members the opportunity to be involved in a meaningful way in the management of the cottage while separating the tasks so that no one individual has all of the power or all of the work.

 

Budgeting:

How will the annual cost of maintaining the cottage be handled?  There are many costs associated with a vacation property: Property Taxes, Insurance, Utilities, Maintenance and Repairs.  Will this be paid for by a stipend that you leave for such purposes?  Or are the children expected to each shoulder his or her pro-rata share?

If your children are expected to pay for the maintenance of the cottage, consider whether they all can afford this cost going forward.  Have you asked them whether they want the cottage to be kept in the family – especially if they are going to be paying for it on an annual basis?

How will the issue of capital improvements be handled?  Again it is important to consider how such repairs and improvements will be paid for.  Homes need new roofs, new furnaces, etc.  Another consideration will be the mechanism of deciding when those repairs and/or improvements are necessary. One child may want to be proactive while another may want to wait until the roof leaks or the furnace quits prior to making the repair.

What happens if one of the members either cannot or will not contribute his or her annual share?  If there are costs to be borne by the children and one does not participate financially, should he or she lose some of the ownership interest in the LLC?

 

Who will be responsible for writing the checks and paying the bills and taxes? Even if the mechanism is in place to have sufficient money available – someone needs to be in charge of making certain that these bills are paid.