As summer approaches and you anticipate another season at the vacation cottage or cabin (“family cottage”), thoughts and discussions may arise with regard to the future of the family cottage. The family cottage traditionally holds a sentimental place for many. It is the gathering place for families, bringing back fond memories as a child growing up, as parents with your children, and as the family patriarch and matriarch. There is often the desire to maintain the family cottage within the family for generations to come, to continue to provide a place for the family to gather together and feel as one. This view is often held by the senior generation, envisioning their children, grandchildren, great-grandchildren and subsequent generations bonding together at this special family gathering place. Despite these fond memories and the desire to maintain the family cottage, there are challenges to consider and developing a plan for the succession of the family cottage is imperative to avoid, or at least have mechanisms in place to deal with, potential problems and conflicts in future generations.
If it is your desire to develop a plan to maintain your family cottage within the family, there are some initial items that should be considered in developing your plan. These considerations should, at a minimum, include: (1) the method of ownership of the property; (2) whether all children or heirs are of like mind in their desire to use and maintain the family cottage within the family; (3) how are expenses associated with the ongoing use, maintenance and preservation of the family cottage to be covered and paid; (4) what are the rules related to the family cottage to help promote peaceful and amicable use among family members; and (5) what are the options and methods for family members who ultimately desire to exit the common ownership of the family cottage.
Choice of Ownership
Structure
There are various ways that the real estate may be owned. Ownership options include, but are not necessarily limited to, joint ownership, ownership by a trust within which the various family members are trustees and beneficiaries, and ownership by an entity, most commonly a limited liability company where the family members are members of the company. The current ownership of choice among most advisors is ownership by a limited liability company (hereinafter referred to as “LLC”). Regardless of the form of ownership selected, a written agreement among the various parties should be developed to address, at a minimum, the following issues: (1) management of the property; (2) the payment of costs and expenses associated with the use and maintenance of the property; (3) specific rules for adding additional family members as owners or beneficiaries; and (4) rules and procedures for the exit of those family members that no longer wish to be part of the ownership structure.
The Family Cottage LLC
Assuming that the LLC ownership structure is selected, the family members who actually hold ownership of the property, or are entitled to ownership, will enter into an operating agreement with each other, each designated as a “member” of the LLC. There are a number of matters requiring consideration with respect to the LCC operating agreement. The following is a brief discussion of some the more significant aspects associated with planning for the family cottage within the LLC.
(1) Management of the LLC. Consider whether the LLC should be governed by all of the members who have ownership in the LLC (a member-managed LLC), or do the members select managers for controlling the LLC (a manager-managed LLC). The member-managed LLC may become cumbersome with too many members. If there are multiple families, each family may elect a manager to represent that family in making day-to-day decisions with regard to the LLC and the property. However, even if manager-managed, there may be significant decisions (such as amendments to the operating agreement, approving capital improvements, mortgaging the property, the sale of the family cottage) which might require consent of all of the members.
(2) Financial Aspects of LLC. The potential financial challenges associated with the use, maintenance and repairs of the family cottage are often one of the most difficult considerations for preserving it within the family. An annual budget of anticipated expenses and income (if any) should be developed. In establishing a budget for the funding of the LLC, the following should be considered: (a) membership fees for all members, typically based upon ownership percentage; (b) assess a usage or rent fee for those members that use the family cottage (based upon the consideration that not all members are able to, or interested in, using the cottage in equal amounts); (c) any agreement should specify the deadline for any such payments or assessments and the consequences of a member failing to pay by the deadline.
(3) Usage of the Property. Consider developing a usage schedule/calendar, which may include rules and procedures as to: (a) determining how cottage use is determined; (b) defining the season for use (for example, summer use and what that entails); (c) how use will be available to each owner during the year; (d) the allocation of use during holiday weeks/weekends; (d) whether the family cottage will be available for rent to non-members.
(4) Rules and Procedures for Transfer of Interests and Exit Strategies. Finally, any agreement should incorporate rules, limitations and procedures relating to the transfer of membership interests by the members, such as transfers to subsequent generations; and an exit strategy for those members who no longer wish to continue to maintain their membership interest in the LLC.
This article highlights various broad considerations relating to maintaining the family cottage within the family for generations to come. These considerations should be analyzed and defined in more detail. However, one thing is certain, the more considered and comprehensive the plan, the greater potential for long-term success of keeping the family cottage within the family.
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