We often plan for important events such as the birth of a child, education, retirement and death. Planning for the succession of the cherished family cabin is one of those important events. Those who fail to plan generally do so out of procrastination or a reluctance to address difficult inter-family situations. However, this reluctance will most likely result in a mess for the family to untangle.
Consider the following fact pattern that is all too familiar. The Anderson family enjoyed their Central Minnesota cabin for many years. The property was frequented by the Anderson’s, their three adult children and their grandchildren. Upon the death of both Mr. and Mrs. Anderson, the children received the property. During their lifetime, the Anderson’s did not foresee any difficulties with the succession of ownership and management of the property. Over time, one child began paying the majority of costs related to the taxes and maintenance of the property and dedicated much time and effort toward maintaining the property. The other two children justified to themselves that their brother had the best ability to pay the costs due to his financial resources. Further, they claim that he uses the property more than they do given his proximity and that of his children. The second adult child lives in Maine and rarely uses the property with the exception of the week of the Fourth of July. The third adult child is an avid fisherman and boater and uses the property a couple of times a month. However, he contributes little to the property. In addition, the cabin can’t accommodate all three children and their families at once. Given the differing perspectives, economic considerations, lack of space and use conflicts, the family is now forced to untangle these issues and come to a resolution.
Developing a plan for the cabin requires forethought and long-range planning. In doing so, cabin owners should involve the entire family in the planning process. In addition, cabin owners should confirm that each prospective new owner has an interest in becoming a cabin owner. Too many times this is taken for granted, and it’s assumed the child wants ownership. However, factors such as financial considerations, proximity, and time can impact the desire to become an owner.
After it’s determined that there is cooperation and a common purpose toward succession of the cabin, a detailed plan should be established to ensure an efficient transfer of ownership, either during lifetime or upon death of the owner. In addition, the plan should contemplate important common ownership considerations such as maintenance, cost sharing and budgeting, use, dispute resolution, creditor protection and other considerations relative to the situation and long-term plan. Because these prospective new cabin owners often have differing financial resources, family size, marital status, and opinions, these differences must be considered while entertaining the ownership considerations.
As expected, there is no “one size fits all” planning option or form of ownership for the transfer and management of cabin property. The following are common forms of ownership used for purposes of cabin succession. Due to the scope of the article, tax considerations and the unique circumstances present in each cabin planning case cannot be addressed with each option.
Direct Transfer of Ownership. A direct transfer of ownership is made by conveying an interest in the property, by deed, to the new owner(s). The primary benefit of a direct transfer of ownership is ease of conveyance. A direct transfer occurs by drafting and recording a deed transferring a cabin interest. There is little cost in a direct transfer. Under certain circumstances, direct transfers can also have negative consequences. Direct transfers offer little or no protection from creditor claims and divorce of a new interest holder. The direct transfer method also lacks a method for dispute resolution, transfer of interests or protection when a new owner wants out. Due to the issues that can arise with common ownership from direct transfers, a co-tenancy or tenants-in-common agreement is often implemented to establish the rights, duties and general terms of the agreement between common owners.
Cabin Trusts. Another form of ownership and conveyance of cabin property is a trust agreement. A trust is an agreement where a grantor transfers property to a trustee to be held, administered and distributed for the benefit of the trust beneficiaries. There are several forms of trusts that can be utilized for a cabin plan. Trusts can be either revocable or irrevocable, and there are several important considerations that may dictate which form of trust is selected.
Trusts are often utilized in a cabin plan because the trust agreement is an excellent tool to outline the terms of the agreement between the new cabin interest holders or trust beneficiaries. Trusts are also popular because estate planners are familiar with trust agreements and trusts have less legal formalities than business entities. Finally, trusts are commonly utilized because they are less expensive to draft and implement than more detailed succession options.
The negative consequences associated with trusts generally deal with the lack of flexibility associated with administering a trust. Certain forms of trusts cannot be amended to address changes in circumstance among the beneficiaries or with the cabin property. Trusts also can be cumbersome for dispute resolution and property management. In addition, when compared to other forms of ownership, trusts can have inferior liability protection for family members.
Business Entities. The ownership of a family cabin can also be transferred in a business entity, such as a partnership or limited liability company (LLC). For purposes of this article, the discussion of the business entity option is limited to limited liability companies (LLC) which involves the formation of a business entity which is organized and registered under state law.
Several advantages in utilizing an LLC for cabin planning are as follows: flexibility in amending the controlling documents, ease of ownership transfer, established management provisions outlining the “basic rules” for the property (such as payment of operating expenses, procedures for transfer of member units or shares, maintenance, budgeting, governance, dispute resolution), creditor protection (protection from divorce, bankruptcy or lawsuit) and limited personal liability.
The primary disadvantages of using an LLC for cabin planning relate to formality and cost. The costs of establishing the entity and maintaining it are new expenses to the LLC owners, although rarely prohibitive. The formalities that exist with LLCs do not exist with other forms of ownership. These formalities including annual registration with the state, maintenance of corporate records and, in some cases, tax returns are required to keep the LLC entity in good legal standing.
Cabin planning avoids a mess by ensuring the proper succession of a key family asset. Planning early gives peace of mind that the succession objectives will be met and fosters communication among the family regarding their interest and intent. Going forward, it’s important to revisit the plan when a change in circumstance arises to ensure that the plan reflects the current intent of the parties.
David M. Ness heads the Estate and Trust practice group at Fafinski Mark & Johnson. He works with individuals and organizations in all aspects of estate planning.