The family cottage traditionally holds a sentimental place for many people. It is the gathering spot for families, bringing back fond memories as a child growing up, as parents with your children, and as the family patriarch and matriarch. Often, people desire to keep the cottage within the family for generations to come, to continue to provide a place for everyone to gather together and feel as one. This view is often held by the senior generation, envisioning their children, grandchildren, and subsequent generations bonding together at this special gathering place. Despite these fond memories and the desire to maintain the family cottage, there are challenges to consider.
Developing a plan for the succession of your family cottage is imperative in order to avoid, or at least have mechanisms in place to deal with, potential problems and conflicts in future generations.
There are various ways that the real estate may be owned. Some ownership options include: 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, an 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:
• Management of the property.
• Payment of expenses associated with the use and maintenance of the property.
• Specific rules for adding additional family members as owners or beneficiaries.
• 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 LLC operating agreement. The following is a brief discussion of some of the more significant aspects associated with planning for the family cottage within the LLC.
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.
Financial Aspects of LLC. The potential financial challenges associated with the use, maintenance and repairs of the family cottage are often some 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:
• Membership fees for all members, typically based upon ownership percentage.
• 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).
• Any agreement should specify the deadline for any such payments or assessments and the consequences of a member failing to pay by the deadline.
Use of the Property. Consider developing a usage schedule/calendar, which may include rules and procedures as to:
• Determining how cottage use is determined.
• Defining the season for use (for example, summer use and what that entails).
• How use will be available to each owner during the year.
• The allocation of use during holiday weeks/weekends.
• Whether the family cottage will be available for rent to non-members.
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.
These are just some 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 your plan, the greater potential for long-term success of keeping the family cottage within your family.
Fraser Trebilcock attorney and CPA, Mark E. Kellogg has devoted his 27 years of practice to the needs of family and closely-held businesses and enterprises, and estate and succession planning. For more information or to discuss your estate planning needs, email mkellogg@fraserlawfirm.com or call 517.377.0890.