Saving the Family Cottage
A Guide to Succession Planning for Your Cottage, Cabin, Camp or Vacation Home
Saving the Family Cottage
A Guide to Succession Planning for Your Cottage, Cabin, Camp or Vacation Home
Plan for the future
David Fry; Rose Hollander; and Stuart Hollander
March 2017, 5th Edition
Estate planning for family cottages and cabins
When family members inherit a vacation home together, problems are often unavoidable, given that the new co-owners may have different financial circumstances or emotional attachments to the family cottage or cabin.
But you can head off damaging family squabbles by developing a legal structure (typically an LLC) to take care of the business of ownership. Whether you’re planning to pass on a cottage to your children, or you’ve inherited a cabin with your siblings, Saving the Family Cottage provides practical, legal solutions for preserving a beloved family property for generations to come. You’ll learn how to:
- keep the peace (and avoid fights) among siblings over jointly-owned property
- prevent a family member from forcing a sale of the cottage or cabin
- keep your vacation home out of the hands of in-laws and creditors, and
- make a smooth transition from one generation’s ownership to the next.
The fifth edition is updated to reflect current tax laws, including state property tax laws which affect choice of legal entity. It also includes an expanded discussion of legal issues when renting a family cottage or cabin on Airbnb, VRBO, or similar rental services.
“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
TABLE OF CONTENTS
Your Cottage Companion
Part I: Cottages at Risk
- Trouble in Paradise
- Time for a Plan
- The First Step
- Avoid the Worst: A Partition Parable
- Plan for the Best: Cottage Succession Goals
- Founder Objectives
- Heir Concerns
- Shared Concerns
Part II: Choosing the Right Path
- How a Plan Helps Save the Family Cottage
- No Plan? Then 600-Year-Old Law Controls the Cottage
- Tenancy in Common
- Nine Rules of Tenancy in Common
- Other Animals in the Property Law Zoo
- Joint Tenancy
- "Indestructible" Joint Tenancy
- Tenancy by the Entireties
- Community Property
- Short-Term Solutions
- Using Life Estates
- The Ownership Agreement
Part III: Cottage Plans in Action
- Choose the Right Legal Entity for Your Cottage
- 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
- Welcome to the Club
- Who Is in the Cottage Club?
- The Branch Concept
- When and How to Organize the Cottage LLC
- Now: The Immediate Cottage LLC
- Later: The Springing Cottage LLC
- The Mechanics of LLCs
- The Role of the Attorney
- The Cottage Safety Valve
- The Put Price
- The Discount
- The Put Terms
- Cottage Democracy
- Member Management
- Using Managers
- Scheduling and Use
- Kinds of Sharing Systems
- Creating a Fair and Sustainable Cottage Sharing System
- Cottage Users
- Renting the Cottage
- Is Rental Permitted?
- Rental Operations
- Who Is the Landlord?
Part IV: Creating a Cottage Legacy
- Minimizing the Federal Tax Bite
- Death, Taxes, and Cottages
- The Price Tag on Cottage Units
- Appraisals and IRS Reporting
- The Ultimate Gift: A Cottage Endowment
- 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
Trouble in Paradise
Time for a Plan............................................................ 10
The First Step.............................................................. 12
At Monica’s family cottage, memories linger like ghosts: grandmother and her formality, fishing poles on the porch, sunlight on the lake, Lassie Come Home moments, 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 wanted to create an estate plan that would keep her lakeside cottage in her family, so her children and their children’s children could share sunny, lazy summer days together.
To achieve that, Monica definitely does need 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 lakefront and -view property in the past generation has changed the way some in the family view their cottage, making strife all the more likely. A cottage may be the most valuable asset a family owns. While some heirs think of cottages as sacred family retreats, others may 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 Chapter 8. The LLC owns the cottage real estate, the cottage furnishings, and perhaps the boats. Instead of transferring interests in real estate to their children, founders transfer the membership interests in the LLC to the cottage heirs. This method means the relationship of the members’ children to the cottage is governed by the LLC 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 cottages throughout the United States. States, however, can and do deviate from classic common-law principles, so the principles stated here may 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. We’ve seen them all, and none of them help when you are gone and your children (and the cottage) run into trouble. Common reasons to avoid making a cottage succession plan include:
The Reason: 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 may end up being sold.
The Reason: 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: The partition cases I’ve handled are proof that it doesn’t always work out just fine.
The Reason: 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 Reason: Lack of foresight.
“What, me plan?”
The Reality: Bad things are more likely to happen without a plan.
The Reason: 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 children. If you are giving them the cottage, finish the job and give them a plan to ensure they enjoy the cottage too.
The Reason: And the ultimate dismissal—a big shrug.
“Hey, I’ll be dead. It’s not my problem.”
The Reality: True enough. How do you want to be remembered?
Many successful founders are careful planners. Sometimes, however, planning is delayed or prevented by the perfectionist’s instinct to address every eventuality. Is your family better off with a perfect plan that is 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?
We often remind clients not to 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 may 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 may 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
Stuart’s mother had a pine sideboard that she just loved. She kept her precious china and glassware in it and dusted her treasures all the time. She really wanted Stuart to have the sideboard and had already picked out the wall in his house where it would go. The only problem was he had never liked the Early American sideboard, which didn’t fit in his Arts and Crafts house. Porcelain and glass didn’t excite him—perhaps a holdover from his days in earthquake-prone San Francisco. Sure enough, when he inherited the sideboard, he gave it away.
Imagine if, instead of a sideboard, it had been a share of a cottage. 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. A parent may have a hard time understanding why his child might not want an interest in the cottage, even if it requires the child to make financial sacrifices (as the parent may have done to acquire and keep it).
A mother of three once asked Stuart to prepare a cottage succession plan. She was the third-generation owner and some of her grandchildren (who would be fifth-generation owners) already had fallen in love with the cottage. She wanted to be sure that the cottage would be available for them to use and ultimately acquire.
This client—let’s call her Mary—must have had some hint that trouble was in the wind. She brought one of her daughters to the first meeting. The daughter expressed great love for the cottage and said she and her brother would want a share of it, but worried that her older sister, who had no children and lived far away, might not want any part of the cottage.
The childless daughter, Ann, attended the next meeting. She politely but emphatically stated she didn’t want a share of the cottage. This seemed to take her mother by surprise. Stuart reviewed Mary’s financial statement and assured Ann that her mother would have the resources to give her cash rather than a share of the cottage. Ann, who entered the meeting quite anxious, left with a smile on her face. Mary left the meeting stunned, but later amended 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.
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, 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.