posted on January 09, 2014 by Scott A. Breen
There is often a great deal of emotional and sentimental attachment to family cottages and hunting land. This type of property produces some of life’s best memories, especially for children.
Because of the prized nature of the cottage or hunting land, families often attempt to protect this property, so that it is not simply sold at the death of its owner. In most instances, the situation involves parents attempting to transfer the family cottage to their children or grandchildren, so that it may be enjoyed for generations to come.
Many parents will pass the family cottage to their children through their wills or revocable living trusts. In some instances, the children will develop a plan to protect and maintain the property. However, in most instances, the children will simply end up selling the family cottage because it creates too much complexity and dissention between them.
It is very important to understand that the preservation of family cottages (and hunting land) creates a number of complex questions such as: (1) How are the property taxes, insurance, and utilities going to be paid; (2) Who is going to physically maintain the cottage/land; (3) When will each child/grandchild be permitted to use the property; and (4) What are the rules for use of the property? In many families, children live in different cities/states and their level of commitment to the preservation of the cottage varies. In addition, some children simply do not have the financial resources to pay their portion of the property taxes, insurance and other expenses associated with a second home.
Fortunately, the parents can create a better chance of keeping this property in the family. This is usually done by the use of a “cottage trust” or a limited liability company (“LLC”). After creation of a cottage trust or LLC, the property is conveyed into this entity by deed. The property is then subject to the terms of the cottage trust or LLC operating agreement, which should address all of the above questions.
The cottage trust or LLC specifies the people who will manage the property and its usage. It is very important that tasks be delegated to the most responsible, able and willing people. Generally, it will be important for the trustees and managers to establish a schedule of usage and rules for the cottage. For example, many families will have a meeting at the beginning of each year to determine the weeks that each child/grandchild will use the cottage. The trustees or managers are responsible for enforcing this schedule. The trust instrument or LLC operating agreement will generally specify the rules that must be adhered to. For example, a family may wish to limit smoking, alcohol, number of guests, etc. There would be consequences for breaking those rules that are enforced by the trustees or managers.
One of the most important issues to consider is whether a cottage trust or LLC is economically feasible. The costs of taxes, insurances, utilities, maintenance and other expenses are extremely expensive. Without the financial resources, the project is sure to eventually fail. Many children simply do not have the funds to contribute to the project. In most instances, the best way to fund the cottage trust or LLC is for the parents to set aside cash or liquid securities specifically for these expenses. The amount of necessary cash or securities must be carefully determined.
There are many issues to consider when attempting to transfer a family cottage, hunting land or any other valuable parcel of real estate to the next generation. That is why it is important to speak with an attorney and other professionals to assist you. With solid planning, you can alleviate a great deal of stress and, hopefully, the property can be protected and enjoyed by many future generations.
Scott A. Breen is an attorney at Willingham & Cote’, P.C. in East Lansing, Michigan. He specializes in the areas of business and real estate transactions. Mr. Breen may be reached at 517-324-1021 or email@example.com.