Plan for the future
Saving the Family Cottage
A Guide to Succession Planning for Your Cottage, Cabin, Camp or Vacation Home
- Product Details
- keep the peace among heirs
- prevent a family member from forcing a sale of the property
- keep your vacation home out of the hands of in-laws and creditors, and
- smoothly transition ownership of the property from one generation to the next.
- About the Author
- Table of Contents
- Time for a Plan
- The First Step
- Founders' Goals
- Heirs' Concerns
- Shared Concerns
- Direct vs. Indirect Ownership
- Concurrent Ownership
- Tenancy in Common
- Nine Rules of Tenancy in Common
- Joint Tenancy
- "Indestructible" Joint Tenancy
- Tenancy by the Entirety
- Community Property
- Using Life Estates
- The Ownership Agreement
- Trusts and General Partnerships
- The Limited Partnership
- The Limited Liability Limited Partnership
- The Corporation
- The Close Corporation
- The S Corporation
- The Limited Liability Company
- Comparing the LLC to the Pretenders
- The Big Picture
- Now: The Immediate Cottage LLC
- Later: The Springing Cottage LLC
- The Mechanics of LLCs
- The Role of the Attorney
- Who Is in the Cottage Club?
- The Branch Concept
- Member Management
- Using Managers
- Kinds of Sharing Systems
- Creating a Fair and Sustainable Cottage Sharing System
- Cottage Users
- Is Rental Permitted?
- Rental Operations
- Who Is the Landlord?
- Liability
- The Put Price
- The Discount
- The Put Terms
- Death, Taxes, and Cottages
- The Price Tag on Cottage Units
- Appraisals and IRS Reporting
- What Is an Endowment?
- How Is an Endowment Established?
- Size of the Endowment
- How Do Heirs Feel About an Endowment?
- The End of the Endowment
- How an Endowment Is Used
- How an Endowment Is Managed
- Sample Chapter
No matter whether you’re planning to pass on a cottage to your children, or you’ve inherited a cabin with your siblings, it’s never too early to take steps to preserve a beloved family property for generations to come. Shared ownership of vacation property—especially when the co-owners are family members—can be fraught with problems. The idyllic dream of a cottage getaway can be shattered when co-owners’ emotions, financial concerns, and opinions on how the property should be used come into play.
Fortunately, a solid plan that dictates how the property will be owned and managed can prevent squabbles over the family cottage. Saving the Family Cottage lays out a roadmap for creating and implementing this plan. It also explains the possible pitfalls of co-owing a family vacation property, and provides time-tested guidance on how to:
The sixth edition includes an expanded discussion of legal issues that might arise from renting out a family cottage or cabin on a short-term basis. It’s also updated to reflect current tax and legal entity laws.
“Practical advice…”-The Grand Rapids Press
“Nolo is always there in a jam as the nation’s premier publisher of do-it-yourself legal books.” - Newsweek
Your Cottage Companion
Part I: Cottages at Risk
1: Trouble in Paradise
2: Avoid the Worst: A Partition Parable
3: Plan for the Best: Cottage Succession Goals
Part II: Choosing the Right Path
4: No Plan? Then 600-Year-Old Law Controls the Cottage
5: Other Animals in the Property Law Zoo
6: How a Plan Helps Save the Family Cottage
7: Short-Term Solutions
Part III: Forming Your Entity
8: Choose the Right Legal Entity for Your Cottage
9: When and How to Organize the Cottage LLC
Part IV: The Details: Putting Your Cottage Plan Into Action
10: Welcome to the Club
11: Cottage Democracy
12: Scheduling and Use
13: Renting the Cottage
14: The Cottage Safety Valve
Part V: Financing the Future
15: Minimizing the Federal Tax Bite
16: The Ultimate Gift: A Cottage Endowment
Glossary
Index
Chapter 1:
Trouble in Paradise
At Monica’s family cottage, memories linger like ghosts: grandmother and her formality, fishing poles on the porch, sunlight on the lake, scavenger hunts, and Monopoly till midnight. Today, Monica can walk into the cottage’s toy closet and it still has that certain smell. “There are so few places in life that seem to not change so much,” she says. “That is one of the reasons I love our cottage. It always stays the same.”
And indeed, with proper estate planning, family cottages can be used by generation after generation, passed from hand to hand like a precious heirloom, to be filled with new memories, new little feet, and new togetherness, as those revered elders smile down from the mantel.
Monica and her siblings want to create an estate plan that will keep her lakeside cottage in her family, so her children and their children’s children can share sunny, lazy summer days together.
To achieve that, Monica definitely needs a plan—but not just any plan. She needs a new form of cottage succession planning that helps protect future generations from showdowns over everything from scheduling to selling the property. Too many cottages go from happy idylls to combat zones, with forced sales, severed relationships, and siblings hurling letters like this at one another: “I am finished with this whole thing. I am tired of dealing with attorneys and you three. I want out now!” Hardly the stuff of sunlit memories.
The terrific appreciation of lake, mountain, and beach property in the past generation has changed the way some in the family view their cottage, making strife all the more likely. A cottage might be the most valuable asset a family owns. While some heirs think of cottages as sacred family retreats, others might resent having their inheritance tied up in the old place. Stepchildren and spouses who did not grow up at the lake often have weak emotional ties to the cottage but strong ties to its cash value. Some siblings never got along.
All of this sets the stage for trouble in paradise. Having no plan for the family cottage, or even relying on a traditional estate plan, makes the cottage and families vulnerable to turmoil.
Formal cottage plans change the way families own their interests in the cottage. Instead of holding a direct interest in cottage real estate, family members own membership units in a limited liability company (LLC), a form of business entity described in detail in Chapter 8. The LLC owns the cottage real estate, the cottage furnishings, and perhaps the associated boats and vehicles. Instead of transferring interests in real estate to their children, founders transfer the membership interests in the LLC to the cottage heirs.
When an LLC owns the cottage, the members’ actions, rights, and duties are governed by the LLC’s operating agreement, not ancient common-law doctrines. The operating agreement
determines everything about the cottage, including scheduling, contributions to expenses, permissible owners, renting, maintenance, and whether the property can be mortgaged. It prevents forced sales, but allows for graceful exits. Chapters 9 through 14 show you how to adapt the LLC operating agreement to your family’s needs.
SEE AN EXPERT
You’ll need an attorney’s help. With the exception of Louisiana, which derives its laws from the French Civil Code, the real estate law principles described in this book generally apply to property throughout the United States. States, however, can and do deviate from classic common-law principles, so the principles stated here might not describe the outcome under the law of the state in which your cottage is located. Please consult a qualified attorney in your state for advice on what’s best for you and your family cottage. (And if you’re Canadian, the limited liability company is not available to you—but because both the U.S. and Canadian legal systems are based upon English common law, the discussion of real estate law, and practical considerations about sharing a cottage, should still be useful.)
Time for a Plan
There is no time like the present to make plans for your cottage’s future survival. Don’t be tripped up by the most common reasons owners die without a plan. Common excuses for not making a cottage succession plan include:
The Excuse: Inability to solve an identified family problem. “John always argues with his brother but they both love Lands End. I don’t know what I’m going to do.”
The Reality: The cottage will probably deepen any discord between children and it might end up being sold.
The Excuse: Idealism. Parents want to believe that everyone will live happily ever after in the cottage. This relieves them of the need to plan. It will all work out just fine.
The Reality: Partition cases (lawsuits seeking to divide the property—more on these later) are proof that it doesn’t always work out just fine.
The Excuse: Unwillingness to impose wishes on heirs. “I don’t want to rule from the grave.”
The Reality: Even children who can work together need a plan to avoid wrangling over scheduling, taxes, and maintenance. A founder who develops a plan in consultation with the heirs has the authority to make final decisions on how the cottage will operate. Often the founder will serve as a tiebreaker in unresolved debates between heirs.
The Excuse: Lack of foresight. “What, me plan?”
The Reality: Bad things are more likely to happen without a plan.
The Excuse: Unwillingness to make the required effort or to incur the expense of developing a plan. “I’m giving them the cottage, isn’t that enough?”
The Reality: Founder-developed plans generally cost less than heir-developed plans because the founders (usually a married couple) are more likely to see eye-to-eye than their heirs. Finish the job and give your heirs a plan to ensure they enjoy the cottage too.
The Excuse: Assumption that kids will take after parents in harmoniously managing family cabin. “Mother and I managed the property together for 25 years without squabbling and I don’t see why the kids can’t do the same.”
The Reality: Mother and Dad were one family unit, and decisions were made the way all other family decisions were made: Issues were either discussed between the parents and a decision was reached, or the “alpha” spouse made whatever decisions were needed and implementation was easy. The problem is when the kids get ownership, there are multiple family units involved in the decision process, with “external” pressure (notably, spousal influence) which might not be consistent with sibling pressure. Decision making is much simpler and less controversial when a written plan provides the outcome of issues instead of family members negotiating every issue that arises.
The Excuse: And the ultimate dismissal—a big shrug. “Hey, I’ll be dead. It’s not my problem.”
The Reality: True enough. But how do you want to be remembered? Many successful founders are careful planners.
Sometimes, however, planning is delayed or pre- vented by the perfectionist’s instinct to address every eventuality. Is your family better off with a perfect plan that’s never implemented because it wasn’t completed by your death, or with a pretty-darned- good plan that was completed in time to be binding?
Don’t let the perfect get in the way of the perfectly adequate. In other words, your cottage plan doesn’t have to be perfect. Almost all of the planning methods described in this book can be revised during your lifetime. Most founders wisely allow their heirs to amend the plan after the founder’s death to meet the family’s changed circumstances or wishes. Founders: Please prepare a plan now. Your descendants will thank you for it.
That’s a Lot of Potential Lawsuits |
The estimated number of vacation homes in the United States ranges from four to eight million, with median sales prices soaring in recent years (according to the National Association of Realtors’ “2016 Investment and Vacation Home Buyers Survey”). The general increase in vacation home values, together with the fact that the majority of cottages are owned free and clear of mortgage debt, means that family cottages often represent a substantial part of an owner’s estate. This sets the stage for a tug-of-war between heirs of modest means (who might be counting on their share of the value of the cottage to pay debts, put their kids through college, or improve their lifestyle) and heirs who have been financially successful (to whom the prospect of using the cottage is more desirable than its cash value). It’s an equation for heartache on a large scale. |
The First Step
There are many good reasons why somebody wouldn’t want a share of a cottage: the expense of maintaining it, bad memories, geography, a spouse’s feelings, and (especially) a preference for the cash value it represents.
The cardinal rule of cottage succession planning is that, before giving it to a child, parents must confirm a child really wants a share of the cottage.
This is not as obvious or simple as it sounds. Parents love the cottage—if they didn’t, they either would have sold it or made arrangements to sell it at their deaths. A parent’s emotional ties to the cottage can blind the parent to the child’s feelings about it. Parents might have a hard time understanding why their child might not want an interest in the cottage, even if it requires the child to make financial sacrifices (as the parent might have done to acquire and keep it).
EXAMPLE: A mother of three, Mary, is the third-generation owner of a lakeside cottage. Some of her grandchildren (who would be fifth-generation owners) have fallen in love with the cottage. Mary wants to be sure that the cottage continues to be available for them to use and ultimately acquire.
Mary decides to visit an attorney to put a cottage succession plan in place. She brings one of her daughters to the first meeting. The daughter expresses great love for the cottage and says she and her brother would want a share of it, but worries that her older sister, who has no children and lives far away, might not want any part of the cottage.
The childless daughter, Ann, attends the next meeting with the attorney. She politely but emphatically states she doesn’t want a share of the cottage. This news comes as a surprise to Mary. Fortunately, the attorney was able to review Mary’s finances, and discovers that Mary has the resources to give Ann cash rather than a share of the cottage. Ann, who entered the meeting quite anxious, leaves with a smile on her face. Mary leaves the meeting stunned, but later amends her estate plan so that Ann would not receive a share of the cottage. By forcing her children to reveal their feelings about the cottage, Mary surely averted great heartache within the family.
RESOURCE
Why it’s hard to keep vacation homes in the family. The problems with passing on a vacation cottage and keeping peace in the family aren’t just legal; they’re emotional and even sociological. In the pioneering book Passing It On: The Inheritance and Use of Summer Houses (Professional Press), the late professor Judith Huggins Balfe described sociological aspects of summer home ownership. It was the first book to tackle why it is difficult to share and pass on summer homes. Professor Balfe and her brother, Ken Huggins, also wrote a companion workbook that contains useful questionnaires, intended to help families with succession planning.
●