As the family gathers at the summer cottage or vacation property each season, the senior generation might think about how nice it would be for these multi-generational gatherings to continue for years to come.
Being proactive, the senior generation might ask their Warner estate planning attorney to help them design a plan for the continued use and enjoyment of this property by future generations. The Warner attorney will ask:
Does it make sense to pass the cottage to future generations?
Don’t assume that because everyone enjoys their time together at the property now, your children or grandchildren will be interested in shared ownership of the property in the future. It is important to ask questions and have honest conversations with the next generation to determine if it is realistic for your descendants to share ownership and use of the cottage.
- Are some of your descendants too busy or do they live too far away to use the cottage often enough to own it?
- Do all of the descendants have the financial resources to contribute to the ownership and upkeep of the property?
- How emotionally attached are they to the property?
- Would joint ownership create friction and drive wedges between family members?
- Would some rather have their own cottages?
If the next generation is interested in sharing ownership of the property, and there are no financial or estate tax issues to resolve in transferring the property, your attorney will want you to consider:
How would this joint ownership be structured?
There are basically three options for the form of ownership and use of a cottage by multiple households of a family, and each form has advantages and disadvantages. The family will have to weigh these and decide which of these forms makes sense for them.
- Co-tenancy - Each of the co-owners would own a fraction or portion of the property. This is the most commonly used form of ownership for our clients sharing property among family members.
- Ownership by a Trust - If a trust owns the property, the trustee will hold title to and manage the property for the benefit of the family members.
- LLC Ownership – If a limited liability company owns the property, the operating agreement determines who the LLC members are and provides a governance structure for use of the property and sharing costs. Because transfers to and within the LLC entity could potentially raise a property’s taxable value significantly, we generally do not recommend the use of LLCs for property that is never rented outside of the family and has a low taxable value as compared to its current fair market value.
Once you have chosen the form of ownership you want to use for the next generations, your attorney will want to discuss:
What type of agreement should be created to govern the use and management of this jointly-owned property?
A co-tenancy agreement, trust agreement or operating agreement is used depending on the ownership structure you choose. Regardless of the agreement type, you will want to build in flexibility for the future and address these issues:
- Allocating Shared Property - To preserve family harmony, the agreement should address potentially contentious issues such as who will determine property usage, how usage will be determined, who can use the property and how important holidays will be allocated.
- Rules for Use - The agreement should provide for establishing a separate Rules for Use document. These rules should allow for changes as experience and circumstances dictate. Examples of rules could include cleaning of the cottage at the end of each use, prohibited activities and usage by friends.
- Payment of Expenses - In paying expenses, it is important to create a sense of fairness between those who frequently use the property and those who don’t. Several options exist for collecting necessary funds, including assessments and membership and usage fees.
- Budgets and Accounting - The agreement should specify that an annual budget, and the proposed payment required of each owner and user, should be established early in the season and provided to all owners. March 1 is a common budget date for Michigan property used in the summer months only. Annual accountings should be created to provide information on the cost of upkeep and foster accountability.
- Decisions - The governing agreement should address financial and management decisions, perhaps naming someone who handles routine expenses under a certain dollar amount and someone who can handle emergencies. The agreement should specify types of decisions that must be made jointly by the owners and a dispute resolution mechanism to be used when family members disagree with decisions made or with the actions of other owners. If you form an ownership committee, the agreement should address the selection and removal process for the committee positions.
- Exit Strategies – These must be established because forcing family members to maintain the ownership and expense of a cottage when they are not willing or able to use it can foster anger and resentment and create issues with the management of the cottage.
If you are considering transferring a family cottage or vacation property to the next generation, Warner can help with the process.
For more information, see our Legacy Matters blog posts, Does It Make Sense to Pass the Cottage to Future Generations?, Ownership Structures for Shared Family Property and Creating a Governance Agreement for a Shared Property.
