Saving The Cottage

How Should the Cottage Be Preserved for the Family? In advising clients about "keeping the cottage in the family", I learned one thing - there is no one-size-fits-all. "Cottage" is a term we use in general to refer to a family’s "up north" property which has been enjoyed by at least two generations and usually more. There is often a great deal of emotion involved in the senior generation about trying to preserve family ownership of the property for use by grandchildren and later generations.
The practical aspects of how and whether a cottage is going to be "kept in the family" is a complicated challenge with many considerations.
How Should Family Ownership be Continued? When the senior generation is gone, the decision about continued family ownership and enjoyment usually comes down to consideration of many factors, among them:
Type of ownership
Property tax considerations
Income tax planning
Usage
Decision making - possible future sale
Ownership. Continued family ownership of the property involves a discussion of the pros and cons of ownership in one of three forms:
1) Trust
2) LLC (limited liability company)
3) Joint ownership
Of these joint ownership is generally the least satisfactory. Ownership as JTWROS - joint tenancy with right of survivorship - is often unsatisfactory became unanimity is required. Fractional ownership - tenancy in common - is generally ruled out because one owner can force a sale of the property.
Between ownership by a Trust and an LLC, there are arguments in favor of each. The LLC can provide for transferrable interests, but a property held by an LLC can never be a "homestead" for Michigan property tax purposes. A beneficiary of a Trust, on the other hand, can claim the homestead exemption if, in fact, the individual occupies the property. (This occupancy does not have to be exclusive.)
Property Tax Considerations. Property taxes are a major concern because of the uncapping of taxable value when the owner, or survivor of a married couple, dies. Although clients tell me that the SEV on lake front property has declined in the last year or so, the SEV is still much higher than the taxable value in the most instances. In considering property taxes, the homestead exemption is especially important and in many instances there is some member of the family who can claim the property as homestead. Continued ownership of the property is the often crafted around this objective, in order to keep long range property taxes at a minimum.
Income Taxes. The income tax aspect of a continued ownership needs to be reviewed. Property taxes and interest are generally deductible on individual tax returns. Usage fees are not deductible and consideration needs to be given whether contributions toward expenses are treated as usage fees or loans. If loans, are the loans to be secured or unsecured?
Expenses of Operation. Consideration needs to be given to how the property expenses are to be funded. Will there be an endowment that the parents provide and, if so, how long will the endowment last? In this respect, parents sometimes decide to endow the continued ownership for a limited period of operation - often three to five years so that the family has time and flexibility to decide how continued family ownership and operation will be handled.
If an endowment is not provided, then some mechanism of providing for usage fees or loans needs to be considered.
Decision Making - Property Usage. In considering continued family ownership, the senior generation needs to give thought to how decisions on property usage and operation are to be made. Is there a committee or board and, if so, how is that group chosen? Decisions have to be made on priority of usage. Is this going to be on a rotation basis, determined by lot, or some combination thereof?
Decision Making - Sale. Generally, the decision on sale is sometimes deferred until an exploratory period has passed. Some provisions generally are made for sale of the property some time in the future by a majority or super majority vote. This can be either on a per capita basis or on a family basis. In the latter case, for example, if there are four children, does each family have a 25% vote? If so, does a family have to vote its entire interest as a whole to prevent a splintering of a family interest? While these questions appear to be a little academic, they often provoke active discussions among family members as to how important decisions like sale of the family cottage are to be made. Needless to say, the articulation of the voting mechanics can get quite complicated, either in the case of ownership by Trust or an LLC.
Conclusion. Continued enjoyment of the cottage by a family, after the senior generation is gone is often an important estate planning challenge with many considerations and alternatives. If your cottage trust needs review, or if one of your clients inquires about making provisions of continued family ownership of the cottage, please call Jim Modrall or any of the attorneys listed below.
Donald A. Brandt, Joseph C. Fisher, Thomas R. Alward, Edgar Roy, III, Matthew D. Vermetten, Thomas A. Pezzetti, Jr., John M. Grogan, Susan Jill Rice, Gary D. Popovits, H. Douglas Shepherd, Laura E. Garneau and David H. Rowe at (231) 941-9660 ©BRANDT, FISHER, ALWARD & ROY, P.C.This newsletter is provided for informational purposes and should not be acted upon without professional advice.