By Attorney James A. Spella
Many families have enjoyed a vacation destination which provided cherished memories for the parents, children and grandchildren. In Wisconsin, this is the “Cottage Up North”. The family Cottage or Cabin should be specifically considered in an estate plan to help avoid issues in the future and allow your family to enjoy the Cottage for generations to come.
There reaches a time when the parents who own the Cottage want to “keep it in the family”. Parents with children, though they may become “empty nesters”, their families expand by the marriage of their children and grandchildren, all of whom to some degree have enjoyed the Cottage.
In planning for distributions after the death of the survivor of the parents, the question arises “What do we do with the Cottage?”. The parents most likely have been the “glue” that have kept the Cottage intact, not only by ownership but by providing for the repairs, maintenance, and expenses of the Cottage. Without proper planning, questions such as “Who gets the 4th of July?” or “Who should pay for it?” can cause a once-treasured property to become the source of major family arguments, which can lead to costly and acrimonious legal disputes.
What are the options?
Sale. The parents can sell the Cottage, but that certainly is diametrically opposed to keeping the Cottage in the family. Very seldom is that ever initiated.
Outright Distribution. Distribute the Cottage to the children and let them decide the future of the Cottage. Though hopefully family members can reach these decisions by consensus, it primarily puts the responsibility of deciding what to do with the Cottage entirely with the Personal Representative of a Will or Trustee of a Living Trust.
Parents should be cautious about outright distribution, as doing so will make your children co-owners of the Cottage. Co-ownership of real estate often leads to issues, especially upon the death of one of the co-owners when the real estate interest passes to heirs (i.e., spouses, children, etc.) or other unanticipated matters, such as divorce. Issues arise in terms of governance and decisions regarding the property, use of the property, and contributions for maintenance, expenses, taxes, insurance, and improvements.
Limited Liability Company. Even before death, parent/owners of the Cottage should consider transferring the Cottage to a Limited Liability Company (“LLC”). It is likely the Cottage is being used by many family members and their guests. The LLC would provide liability protection to the parent/owners.
The LLC could then be distributed outright to the children at death, at outlined in Option #2. However, the parents could create an Operating Agreement, which would provide assistance to the next generation owners. This should be seriously considered.
The Operating Agreement would assist the children in governance, management, and ownership of the LLC during their lifetimes and in the future.
An LLC approach which could be considered would be to create a Family Unit for each child. For example, if the parents had three (3) children, Amy, Bob, and Carol, each child would own one-third (1/3) of the LLC. The LLC Operating Agreement would create a Family Unit for Amy, Bob, and Carol.
The Family Unit ownership would extend to Amy, his children, his grandchildren, etc. The Family Unit would have one (1) vote. For example, if Amy had three (3) children herself, after her death, her three (3) children by majority vote would select one of those children to cast the vote for that Family Unit.
The LLC Operating Agreement could provide for the appointment of a Property Manager who would oversee the Cottage and its care and maintenance.
The LLC Operating Agreement could provide for the appointment of a Financial Manager, who would be responsible for creating a budget, with an assessment for each Family Unit, to provide funds for the maintenance and expenses of the LLC and the Cottage.
Without going into too much detail, the Operating Agreement could additionally provide for the following:
- Loss of the Family Unit vote if the assessment has not been paid.
- Option to purchase a Family Unit ownership’s interest if assessments have been unpaid for a number of years.
- Provisions that would address the death of a Family Unit member.
- Provisions that would address the divorce of a Family Unit member.
- Provide for exit strategy for Family Unit members who no longer want to own part of the Family Unit ownership.
- Provisions regarding scheduling and use of the Cottage.
Family Unit LLC with Option on Distribution. It is not unusual in this mobile society to have children who grew up and enjoyed the Cottage to be geographically hindered to use it in the future. In our example, if Bob lives in Oregon, even though fond memories as a boy going to the Cottage are cherished, the Cottage is not part of his current lifestyle nor that of his family.
Accordingly, in the parents’ planning documents, they should give an option to each of their children to fund that child’s equal inherited share with the LLC if they chose to do so. Accordingly, the parents are not forcing a child to own the Family Unit, but giving them the option, and if the option is exercised, then providing the Operating Agreement as a beneficial document for their ownership and management.
Let’s assume that the parents have an estate of $1,800,000, comprised of a $300,000 Cottage and $1,500,000 of cash, insurance proceeds, investments, etc. After the death of the surviving parent, each child would inherit $600,000. If they all chose to receive the LLC as part of their inherited share, they each would receive $500,000 in cash and a one-third interest in the LLC values at $100,000.
If Bob did not exercise his option to fund his one-third share with the LLC, but Carol and Amy did, Bob would receive $600,000 in cash. Carol and Amy would each receive $450,000 in cash and a one-half interest in the LLC each valued at $150,000.
If the parents are certain that Bob would not want to exercise his option to fund with the LLC Family Unit, then the option to fund could just be granted to Carol and Amy.
Each family has unique considerations regarding the Cottage, the dynamics of the family members, the parents’ objectives, and the desired objectives of the family members.
Leaving the Cottage to the children outright will continue to be the likely experience for most recreational properties. Utilizing the LLC with the Family Unit Operating Agreement provides an opportunity for parents to assist the next generation in common ownership.
If you have any questions about this article, please contact us at 262-334-3471 or [email protected].
Originally published March 12, 2019
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Disclaimer: The information contained in this post is for general informational purposes only and is not legal advice. Due to the rapidly changing nature of law, Schloemer Law Firm makes no warranty or guarantee concerning the accuracy or completeness of this content. You should consult with an attorney to review the current status of the law and how it applies to your unique circumstances before deciding to take—or refrain from taking—any action. If you need legal guidance, please contact us at 262-334-3471 or [email protected]rlaw.com.