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Legacy Matters
BlogsPublications | June 21, 2023
7 minute read
Legacy Matters

Shared Ownership of Family Cottages, Part Two: Ownership Structures for Shared Family Property

In my last post about shared ownership of cottages, I discussed items to consider when deciding whether to create a plan for future generations to share the ownership and use of the family cottage or vacation property. Once you have made the decision to pass the ownership of a family cottage or vacation property to the next generation, you will need to give thought to how that ownership will be held.

There are basically three options for the form of ownership and use of a cottage by multiple households of a family: co-tenancy, a trust or a limited liability company (LLC). Each form has advantages and disadvantages, which means that each family will have to weigh these and decide what form makes sense for them.

Sometimes, one of the most important factors that affects the form of ownership revolves around the property tax rules. In Michigan, the taxable value of real estate for property tax purposes can increase each year by the lesser of 5% or the rate of inflation. Over time, this cap on increases often creates a significant gap between the property’s taxable value and its state equalized value (SEV), which is supposed to equal 50% of the fair market value of the property. The assessor is allowed to reset taxable value when there is a “transfer of ownership.” This is referred to informally as “uncapping.” There are a number of exceptions to what constitutes a “transfer of ownership” with respect to residential property. These rules can be complex, and some of the exceptions are subject to differing interpretations and are not always internally consistent from circumstance to circumstance. Because vacation properties may not change hands very often, it is common to find a significant gap between the taxable value and the SEV. The choice of form of ownership often needs to consider and carefully navigate the exceptions to uncapping to avoid dramatic increases in the taxable value of the cottage. 

Co-tenancy Ownership of Shared Family Property

In a co-tenancy, each of the co-owners would own a fraction or portion of the property.  Typically, the ownership would not be owned with rights of survivorship. This will allow each co-owner to control ownership of his or her share of the property (subject to any agreements with other co-owners). In a co-tenancy arrangement, we recommend that the co-owners address ownership and management issues through a written agreement.

Of the three ownership structures, this form can be easiest to change to adapt to family circumstances and needs. For this, and other reasons, this is the most commonly used form of ownership for our clients seeking to share ownership among multiple family members.

Advantages of Co-tenancy:

  • Taxable value is not uncapped upon the addition or death of a joint owner who is an immediate family member (parent, spouse, sibling, child, grandchild).
  • No income tax results from a liquidation of the co-tenancy.
  • No separate tax returns are required because income and losses pass through to all owners pro rata based on ownership.

Disadvantages of Co-tenancy

  • Each owner has personal liability for all taxes, expenses and liability resulting from injury of others on the property. This can be addressed through an ownership agreement and with homeowners, renters and umbrella insurance. 
  • An owner’s interest is accessible by creditors, including a spouse involved in a divorce proceeding. However, a co-tenancy agreement can give other owners rights to purchase the interest to maintain ownership in the family.
  • Owners have the right to force a partition (division) of the property in order to sell their interests, which could lead the other owners to a forced sale of the property. This right can be waived by a recorded, written agreement.
  • If an interest in the property is owned in an individual name, on the death of that owner, probate will be required in the state where the property is located. This can be avoided by each owner having a trust agreement or another method for avoiding probate on the death of the owner (joint ownership, ladybird deed, etc.).

Ownership of Family Property by a Trust

Transferring the property into a trust allows a trustee to take title to and manage the property for the benefit of the family members.

Advantages of Trust Ownership:

  • Taxable value is not uncapped if property is transferred to or from a trust for immediate family members or if present beneficiaries who are immediate family members of the settlor or settlor’s spouse are added or substituted.
  • No income tax results from the creation or termination of the trust.
  • The trust agreement determines the permitted beneficiaries.
  • Beneficiaries do not have a right to force a partition of the property.
  • No probate is required on death of a beneficiary. 
  • A spendthrift provision can provide creditor protection.

Disadvantages of Trust Ownership:

  • Beneficial ownership is controlled by the trust agreement, not the beneficiaries.
  • An irrevocable trust cannot be amended easily after formation, making changes to ownership, management and rules for ownership less flexible over time.
  • As in co-tenancy, no liability protection is afforded to the owners or trustees.
  • If the trust generates taxable income over $600 per year, a separate income tax return must be filed for the trust, using trust tax rates.
  • The trust should be endowed with cash or investments to cover the expenses of ownership of the property.

LLC Ownership of Family Property

Creating a limited liability company to own the shared property provides an operating agreement that controls who the LLC members are and provides LLC procedures. 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 current fair market value. This is primarily because of the current uncertainties about possibly uncapping the property’s taxable value upon a transfer to or from an LLC or upon a 50% or larger change in ownership of the LLC.

Advantages of LLC Ownership:

  • The operating agreement can be amended, making it flexible over time.
  • The LLC offers liability protection for the members.
  • No probate is required on the death of a beneficiary.
  • LLC members do not have a right to force partition of the property.
  • The LLC manager controls day to day decisions, and the less stringent business judgment rule applies to the manager’s decisions.

Disadvantages of LLC Ownership:

  • Property taxes may be “uncapped” upon a transfer to an LLC, but some assessors follow the ‘mirror image’ rule that if owners of the LLC are the same as the property’s owners before the LLC was created, it is not an uncapping event. The final decision is made by the State Treasury Department, which may overrule a local assessor’s determination.
  • Property taxes likely will be uncapped upon a change in ownership of 50% or more of the membership interests, and there is no exception for transfers as a result of death.
  • It is unclear whether a transfer of 25% from parent to child, followed by a transfer of the same 25% from the child to a grandchild or spouse would count as a 50% transfer.
  • The LLC should be “endowed” with cash to fund operating expenses.
  • A separate income tax return is required for the LLC. 
  • A member’s interest in the LLC is accessible by creditors, such as in a divorce or bankruptcy, although the LLC operating agreement can give other owners rights to purchase the membership interest to maintain ownership in the family.
  • Property and casualty insurance may be more difficult and expensive to obtain.

Which Property Ownership Form Makes Sense for You?

It really comes down to which advantages are important to your family and which disadvantages are deal breakers for you. Also figuring in here could be your definition of family, which may not be recognized or treated equally under property tax uncapping rules. And some decisions will have to be made about who can be an owner/member or who is an eligible beneficiary.

If you are ready to start planning for the future of your family cottage or vacation property, Warner can help. Contact your estate planning attorney or Mark Harder, at or 616.396.3225.