Wisconsin Family Cabin LLCs

By: Attorney Amanda N. Sacks and Elliot Depies

If you have property you wish to pass on to the next generation, we recommend forming a Limited Liability Company (LLC) for ownership.  An LLC Governance Agreement, called an “Operating Agreement,” can address many family concerns.

While LLCs are often used for business purposes, you can also create one for your family. These LLCs are often used in Wisconsin for family cabins “up north,” lake properties, or hunting properties that are co-owned and used by the entire family. Owners are frequently concerned with what will happen to their property in the future. They want to make sure that the place with so many sentimental memories will continue to be used for years to come by their children and grandchildren.

1. Problems with Co-Ownership

Simply leaving the cabin to the kids through a will or trust can cause problems down the road. Fights often erupt over issues such as who gets to use it, when people get to use it, and how will the maintenance and taxes be paid for. Problems are also inevitable when a child who owns part of the cabin passes away, divorces, has a medical emergency, or faces the high cost of nursing home care for themselves or a spouse.

2. Solution: LLC Operating Agreement

Creating an LLC with an Operating Agreement can help solve these problems by creating a neutral document that all members can agree to in advance and can look to if there is an issue. Operating Agreements are documents that are commonly used for LLCs and establish how an LLC will be run. Their terms cover a variety of situations such as contributions for expenses, general use of the property, and the rules and regulations of the property. These can be made at any point during the life of the LLC, but it is best to make one at the outset of the creation of the LLC before problems arise.

Operating Agreements can be customized to fit your particular family and property; nevertheless, there are some standard key terms that one should consider when approving an Operating Agreement. Key terms include the following:

• Initial Assets and Additional Funds. Typically, the LLC will own real estate.  You should consider if the LLC would own any assets, such as a bank account with starting funds to cover the costs of repairs or improvements for a few years, as well as utilities, real estate taxes, insurance, etc. Normally, an Operating Agreement will provide that the LLC will maintain at least a minimum amount of funds in a bank account to cover unexpected costs.  We recommend at least $5,000 to cover most situations and expenses, such as the property taxes, insurance, and any minor unexpected repairs.  Once those funds are depleted, the Operating Agreement will contain provisions to require each member to contribute additional funds.  If a member does not pay their share, their use of the property can be restricted, and other members can be permitted to buy them out.
• Use of the Property. Typically, LLCs are formed to hold the property for family use.  An Operating Agreement will often prohibit commercial or rental use.
• Rules and Regulations. The Operating Agreement will also address rules and regulations for the use of the property.  Standard rules we recommend include the following:
  • We often recommend selecting a managing member.  This will allow one person to be in charge of the day-to-day management and coordinate matters such as repairs, payment of taxes and utilities, and scheduling the use of the property. This person will have a fiduciary duty to the LLC to manage it in the best interest of the LLC and not for his or her sole benefit.  While one person usually is put in charge of managing day-to-day matters, major decisions such as large capital improvement or sale of the property should require consent of the majority of the members or unanimous consent.

   

  • Restrictions on Ownership. We generally recommend stringent rules be put in place to restrict ownership, as having co-owners can often lead to issues.  A standard provision may restrict ownership transfers solely to blood descendants and not to spouses.  This type of provision can help avoid fights.  For example, it would clarify what happens should one of your children wish to leave their share to their spouse and their spouse would have their own children from a prior marriage or their own family interests; we typically recommend prohibiting transfers to spouses.

   

  • Buyout Provisions. An LLC Agreement should also contain provisions for buyout. For example, if a child no longer wishes to co-own the property with their sibling(s), they should have a way to leave for a fair purchase price.  Normally, we recommend that the value be determined by an appraisal, but there may be alternative methods (such as value on a tax statement) which could be utilized.

   

  • Common Optional Rules. Families sometimes want rules and regulations that are specific to how they want their property used, which may be quite different from other families. These can include, for example, no smoking or no pets or only specific kinds of pets. They may want written rules about the proper use of boats or UTVs, lawn mowing requirements, maintenance of firepits, or a written schedule for use of the property on holidays. A family may also want to allow use of the property only when there is a member of the LLC present at the property.

   

  • Family Unit. Another advantage of an Operating Agreement’s terms is creating rules around what happens with family units for the LLC. Family Units are when ownership shares of an LLC are divided among various LLC members who are themselves a family. Here, one family may have multiple people who need to decide unanimously or by a majority vote what they want to do in a particular situation. They would then select one person to cast the vote for their family unit. For example, if a cabin was part of an LLC whose owners were three siblings, Ana, Bill, and Corey, each sibling would have a one third interest and a one third vote on any decision. If Bill passes away, his children would likely get his interest and would then decide together how to cast that one third vote. An Operating Agreement would help clarify which interests would be a family unit interest, and how each of those family units would function, especially in the case of a family unit owner, like Bill, passing away or wishing to sell their interest in the LLC.

   

  Next Steps

  While it does take some work to set up an LLC, use of an LLC can help you and future generations of your family enjoy the use of the property. Just as important, it can also help avoid costly lawsuits.  Unfortunately, all too often, we see situations where children or grandchildren are unable to manage co-ownership of a property when proper documents have not been put in place. This can lead to lawsuits among family members or a partition action forcing the sale of the property. In these situations, feelings are hurt and money must be spent on court and attorneys’ fees. Luckily, these problems are all easily avoidable with some foresight and planning.

  If you would like to discuss setting up a Family LLC to own family property, please do not hesitate to call our office and ask for this article’s author, Attorney Amanda Sacks, or one of our Business Law Attorneys. We generally will need a copy of the deed or the tax bill for the real estate, and information for all family members involved.  While it may cost a few thousand dollars to set up one of these LLCs, you may be avoiding tens of thousands of dollars in attorneys’ fees and fights down the road.

  Originally published: July 9, 2024.

   

  More Important Reading

  • Estate Planning for Mixed Families and Second Marriages
  • Your Family Business Succession Plan
  • Time Marches On: Do I need to Update My Estate Plan?

  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].