The Ins and Outs of Cottage Succession Planning in Michigan (Part Two)

This is part two of a two-part blog post series on cottage succession planning in Michigan.

As summer winds down, the second-home market continues to heat up in Michigan. One of the issues many second-home owners face is determining the best way to keep a family cottage in the family for generations to come. In this series on cottage planning in Michigan, we are addressing that very issue.

In part one, we discussed the reasons why a cottage owner may want to develop a cottage plan (including Michigan’s complicated real estate tax framework). This article deals with the mechanics of cottage succession planning in Michigan—specifically, utilizing a limited liability company or trust structure to allow a cottage to be used and enjoyed by future generations in an organized way that helps reduce the risk of family disputes, thereby increasing the likelihood that the cottage will be part of the family for years to come.

What is a Cottage Plan?

A cottage plan is an agreement that describes how a cottage will be shared, managed and passed on to future generations of family members. Cottage plans typically cover a range of issues that can impede the succession of a cottage if left unaddressed, including:

      • Who should own the cottage?
      • Who should manage it?
      • Who should pay for it?
      • What if an owner wants/needs out?
      • Who gets to use it?
      • How should use be scheduled?

By working through these issues in a cottage plan, an owner (or “founder” in cottage-planning lingo) can achieve various goals that are commonly shared by those who desire to keep the cottage in the family. Those goals include:

      • Keeping the cottage in the family for future generations so that it can continue to serve as a gathering place for extended family
      • Giving children equal shares of the cottage (while avoiding “trapping” an inheritance in the cottage)
      • Keeping interests in the cottage out of hands of in-laws and creditors
      • Reinforcing family interests versus any one individual’s interests

An effective cottage plan can and should also address the objectives of the family members (or “heirs”) who will enjoy the cottage beyond the owner’s lifetime. Such objectives include:

      • Protecting the cottage from a divorce
      • Developing decision-making structures and control mechanisms
      • Developing consequences for failure to abide by rules—financial and behavioral
      • Developing a fair, flexible scheduling system
      • Provide an exit strategy where desired or necessary by providing the ability to sell interests back to family

Cottage Planning Solutions

Most husbands and wives who own a cottage hold title as joint tenants with rights of survivorship, which means that title to the property automatically passes to the survivor on the death of the first co-owner regardless of any provision in a will or trust. Upon the death of the survivor, and in the absence of a cottage plan, the cottage will pass to heirs as tenants in common.

A tenancy in common can be problematic for a number of reasons, including:

      • Each tenant in common (“TIC”) has a right to partition
      • Each TIC may use the cottage at any time
      • A TIC may transfer his interest to any person at any time – including his/her spouse.
      • A TIC does not owe rent to the other owners for using the cottage.

A better approach, which helps avoid the issues that often arise when heirs are tenants in common, is to have title to the cottage held either by a limited liability company (“LLC”) or a trust. Under an LLC structure, a management committee, which serves a function similar to a board of directors, is formed to manage the cottage’s affairs. With a trust, co-trustees are appointed to make decisions. In either case, if the family and entity is structured by branches, it is advisable to have one representative from each branch of the family involved in decision making.

Through the cottage planning process, the founders decide who may be a “member” (under an LLC) or beneficiary (under a trust). Virtually all cottage plans restrict participation to lineal descendants of founders, which ensures the cottage remains in the family—in other words, preventing in-laws from becoming members or beneficiaries.

One of the primary advantages of having a cottage plan utilizing an LLC or trust structure is that it provides a mechanism for transferring membership or beneficial ownership interests. Plans typically include a “put option” which requires the LLC or trust to purchase the interests of members or beneficiaries who want to sell their stake, and a “call option” that allows for the forced buy-out of difficult members or beneficiaries. Valuation and payment term guidelines for purchases are defined in the plan. This provides a predetermined exist strategy for those who do not wish to participate in the cottage or those who do not or are unable to contribute their fair share to cottage costs and expenses. The predetermined terms established for the buy-out provisions offer the opportunity for a graceful exit.

Plans also address issues related to expenses, such as taxes and maintenance, for the cottage. Expenses are typically allocated according to a predetermined sharing ratio among the members and beneficiaries. Often, an annual budget is prepared and an annual assessment is determined at the beginning of each year or season. Failure to pay expenses can be dealt with through an escalating series of sanctions, from the imposition of late fees and interest all the way to the forced buy-out of the delinquent member or beneficiary.

In many instances, founders choose to offset the ongoing expenses of a cottage by establishing an endowment, which is a dedicated sum of money for a specific use. For example, a $500,000 endowment invested at a five percent rate of return will create a pre-tax return of $25,000 per year, which is a sum sufficient to operate many cottages. The endowment may be held and managed by a bank trustee or by the LLC. If a cottage is sold, the endowment distributes to the founder’s descendants. One way to fund the endowment is to purchase a “second-to-die” life insurance policy.

Finally, a cottage plan typically addresses issues related to the use of the cottage—that is, who can use the cottage at any given time. Two common approaches include a “rooming house” structure in which any member or beneficiary can use it any time, and a “time share” structure in which members and beneficiaries are allocated specific time slots for use.

Take Action to Create a Cottage Plan

There are significant advantages to having a cottage plan that utilizes an LLC or trust structure. There is no single option that is best for all families, so it’s important to consult with an experienced cottage law attorney to determine what option is right for you. With a bit of planning, you can help ensure that your cottage will be a source of enjoyment for your family for generations to come.

If you have any questions about planning issues for your cottage in Michigan, please contact Fraser Trebilcock shareholder Mark Kellogg.

This alert serves as a general summary and does not constitute legal guidance. Please contact us with any specific questions.


Fraser Trebilcock attorney Mark E. Kellogg is a certified public accountant, and has devoted over 30 years of practice to the needs of family and closely-held businesses and enterprises, business succession, commercial lending, and estate planning. You can reach him at 517.377.0890 or mkellogg@fraserlawfirm.com.

The Ins and Outs of Cottage Succession Planning in Michigan (Part One)

This is part one of a two-part blog post series on cottage succession planning in Michigan. You can view part two here.

The family cottage is a place for fun and relaxation in Michigan. It’s where different generations gather and form lifelong memories. When purchasing a cottage, it’s often the intent of the owner to pass the cottage on to future generations to enjoy. Unfortunately, that vision may not become a reality due to challenges such as high property taxes, differing objectives among heirs and resulting family disputes that result in the cottage being sold upon the owner’s death. Common issues that prevent the passing of a cottage to future generations in Michigan can be addressed through careful cottage succession planning.

Michigan is a Market for Second Homes

When the COVID-19 crisis hit, many predicted calamitous economic consequences. With record-high unemployment and a plunge in gross domestic product, there has been a severe plunge in economic activity across the United States. However, few anticipated that a mere four months after the pandemic took hold in Michigan and across the country, we would see record home sales driven by low mortgage rates and flight from dense urban areas.

In 2020, the Wall Street Journal reported that in New York City the luxury real-estate market has been delivered a “stunning gut-punch” due to the COVID-19 crisis. Meanwhile, the Detroit Free Press reported that Michigan’s “Up North” cottage market has “become a red-hot market this summer, and not just despite COVID-19, but perhaps because of it,” with sale prices up as much as 10% from a year ago in some areas.

With plentiful access to fresh water and beautiful natural landscapes, Michigan has always been a desirable place to own a cottage. In fact, the National Association of Home Builders estimates that 50 percent of second homes in the United States are located in eight states, with Michigan being one of them.

With so many second homes in Michigan, it’s natural that there is a great deal of interest among homeowners in succession planning issues that allow second-home cottages to remain within their families for generations to come. The goal of cottage succession planning is to set up legal ground rules that provide the best chance to keep a cottage in the family and prevent intra-family squabbles that may arise in the absence of a plan.

Reasons to Develop a Cottage Succession Plan

There are a number of reasons why a cottage owner may want to develop a cottage plan, which usually addresses concerns about successorship through the creative use of a limited liability company (LLC) or a trust (typically used for more favorable treatment associated with the uncapping of taxable value), tailored specifically for ownership of the cottage property. Here are ten common reasons why a cottage plan may be advisable.

      1. Prevent a joint owner from forcing the sale of the cottage through an action for partition
      2. An alternative to allowing common law rules to dictate how the cottage operates
      3. Prevent transfer of an interest in the cottage outside the family
      4. Protect owners from creditor claims
      5. Establish a framework for making decisions affecting the cottage
      6. Provide sanctions for nonpayment of cottage expenses
      7. A vehicle for an “endowment” (money set aside to fund cottage expenses)
      8. To require mediation or arbitration of family disputes
      9. Allocate control of the cottage between or among generations of owners
      10. May help delay (or avoid) the uncapping of Michigan property taxes

Michigan Real Estate Taxes

Cottage succession planning in Michigan has unique aspects due to its complicated real estate tax framework. Pursuant to Proposal A, a 1994 amendment to the Michigan Constitution, a property’s annual assessment increase is “capped” and cannot exceed the lesser of five percent or the rate of inflation during the preceding year. However, when ownership of property is “transferred” to a new owner, the property value is “uncapped” for purposes of calculating property taxes, and the value is adjusted to the current fair market value.

Prior to Proposal A, it was common for cottage planning to involve the use of a limited liability company (“LLC”) to enable successive generations to use and manage a family cottage. But the Michigan legislature, in revising real property tax laws to address Proposal A, did not include LLCs as a means of “transfer” that would prevent the uncapping of property taxes.

Pursuant to Michigan Compiled Laws, Section 211.27(a), transfers of ownership do not include (and therefore do not give rise to uncapping) the following:

      • Transfers to a spouse or jointly with a spouse
      • Transfers to a “qualified family member”
      • Transfers subject to a life lease retained by grantor.
      • Transfers to a trust if the settlor, settlor’s spouse or a “qualified family member” is the present beneficiary of the trust
      • Transfers from a trust, including a beneficial interest in a trust, to a “qualified family member”
      • Transfers from an estate to a “qualified family member”

A “qualified family member” includes:

      • Transferor
      • Spouse of the transferor
      • Transferor’s or transferor’s spouse’s:
      • Mother or father
      • Brother or sister
      • Son or daughter, including adopted children
      • Grandson or granddaughter

The Trust Approach to Cottage Succession Planning

Although the manager and member structure and the limited liability protection afforded LLCs make them the ideal entity to be used for cottage succession planning, in Michigan, the favorable treatment associated with trusts as a means to prevent the uncapping of real estate taxes upon transfer of a cottage to the next generation, have resulted in trusts being the entity of choice in Michigan. Part two of this series will discuss in further detail the aspects of using a trust in cottage succession planning in Michigan allowing the cottage to be used and enjoyed by future generations in an organized way that helps reduce the risk of family disputes and accordingly increases the likelihood that the cottage will be part of the family for generations to come.

If you have any questions about planning issues for your cottage in Michigan, please contact Fraser Trebilcock shareholder Mark Kellogg.

This alert serves as a general summary and does not constitute legal guidance. Please contact us with any specific questions.


Fraser Trebilcock attorney Mark E. Kellogg is a certified public accountant, and has devoted over 30 years of practice to the needs of family and closely-held businesses and enterprises, business succession, commercial lending, and estate planning. You can reach him at 517.377.0890 or mkellogg@fraserlawfirm.com.

Why Your Caretaker Agreement Should Be Medicaid-Compliant, Even If You’re Not on Medicaid

Trusts & Estates - Fraser TrebilcockUnder current Medicaid policy, what you don’t know about care contracts might actually hurt you.  The definition of what is considered a care contract under Medicaid policy is broad.  Currently, any arrangement under which an individual is paying for health care monitoring, medical treatment, securing hospitalization, visitation, entertainment, shopping, home help or other assistance with activities of daily living is considered a personal care contract.  Further, any arrangement which pays for expenses such as home/cottage/car repairs, property maintenance, property taxes, homeowner’s insurance, heat and utilities for the homestead or other real property of the client’s is considered a home care contract.  These are the types of things that allow individuals to age in place and remain in their homes as long as possible, as opposed to entering a nursing home.

The reason Medicaid’s care contract policy will harm those who don’t know about it is all payments made to caregivers for any of these types of services within 5 years of applying for Medicaid benefits will be considered a divestment for purposes of Medicaid eligibility unless a Medicaid-compliant caregiver contract was in place.  Divestments are defined as transfers for less than fair market value.  Divestments result in a penalty period during which Medicaid will not pay for an individual’s costs for long-term care services, home and community-based services, home help, and home health.

Most people do not anticipate entering a nursing home or needing long-term care Medicaid benefits.  Even so, they are expected to know when and if this will occur, and they need to know at least 5 years in advance so that they can take the necessary precautions with respect to personal care and home care contracts, or face penalty.  No one has a crystal ball that views 5 years out; therefore, the best practice is to establish Medicaid-compliant caretaker contracts for all personal care and home care contracts to ensure no penalty is assessed in the event that long-term care Medicaid is needed in the future.

Additionally, this policy applies equally to arrangements with both relatives (anyone related by blood, marriage or adoption) and non-relatives (including third-party commercial providers).

For a personal or home care agreement to be considered Medicaid-compliant (i.e. not be considered a transfer for less than fair market value [i.e. divestment] for purposes of Medicaid), each of the following must be met:

  1. The services must only be performed after a written legal contract/agreement has been executed between the client and provider.
  2. The contract/agreement must be dated, notarized, and signed by the provider and the client, either individually or by the client’s agent under a power of attorney, guardian, or conservator, provided that the person signing for the client is not the provider or the beneficiary of services.
  3. No services may be paid for until the services have been provided (there cannot be prospective payment for future expenses or services).
  4. At the time that services are received, the client cannot be residing in a nursing facility, adult foster care home (license or unlicensed), institution for mental diseases, inpatient hospital, or intermediate care facility for individuals with intellectual disabilities.
  5. At the time that services are received, the client cannot be eligible for home and community based wavier, home health, or home help.
  6. The contract/agreement must show the type, frequency and duration of such services being provided to the client and the amount of compensation being paid to the provider.
  7. Payment for companionship services is prohibited.
  8. At the time services are received, the services must have been recommended in writing and signed by the client’s physician as necessary to prevent the transfer of the client to a residential care or nursing facility.

Note, also, that there is a presumption that relatives who provide home and personal care services do so for love and affection only.  Payment for home and personal care services to relatives creates a rebuttable presumption that the payment was a transfer for less than fair market value (i.e. a divestment).  Therefore, even if a Medicaid-compliant caregiver contract is in place for services provided by a relative, if and when Medicaid is applied for, the Department of Health and Human Services will determine fair market value for such services by comparing the contract price to other area businesses which provide such services.  If the relative’s rate was greater, it will very likely be considered a divestment.  For this reason, it would be wise to compare a relative caretaker’s cost of services to other providers in the area in advance to be sure the rate is similar.  Additionally, it is recommended that the documentation gathered is retained in case fair market value is contested in the future.

Questions? Contact us to learn more.


Mysliwiec, Melisa

Fraser Trebilcock provides counsel on all matters relating to the legal planning for care and support of those needing Medicare and Medicaid. Attorney Melisa M. W. Mysliwiec focuses her work in the areas of Elder Law and Medicaid planning, estate planning, and trust and estate administration. She can be reached at mmysliwiec@fraserlawfirm.com or 616-301-0800. You can also click here to learn more about our Trusts & Estates practice.

 

IRA Trusts Can Be Useful to Counteract Recent SCOTUS Ruling on Inherited IRAs

 The Supreme Court ruled on June 12, 2014, that inherited individual retirement accounts (IRAs) are not protected from creditors during bankruptcy proceedings as they are not “retirement funds” within the meaning of 11 U.S.C. §522(b)(3)(c).[1] The petitioners in the case originally filed for bankruptcy under Chapter 7 of the Bankruptcy Code (the “Code”) and attempted to exclude about $300,000 of an inherited IRA from the bankruptcy estate.  They claimed that they fit within the “retirement funds” exemption of the Code. The Bankruptcy Court disallowed the exemption but the District Court reversed, stating that the retirement funds exemption covers any account in which funds were saved for retirement. The Seventh Circuit reversed the District Court and the Supreme Court affirmed.

Continue reading IRA Trusts Can Be Useful to Counteract Recent SCOTUS Ruling on Inherited IRAs

Estate Strategies: Michigan Snow Birds in Florida

As warm weather returns to Michigan, so too do our State’s snow birds. While in Florida, some of you may have purchased assets or developed relationships with health care professionals. Others of you may have pondered moving to Florida full time or considered investing in Florida real estate. As such, Spring is the perfect time to evaluate your life at the other end of the I-75 corridor and ensure that your current estate plan protects your interests in the Sunshine State.

One important issue to consider is whether you have the appropriate Power of Attorney (POA) documents in place. Most of you likely have a Michigan Durable Power of Attorney and/or a Patient Advocate Designation. However, do you also have the Florida equivalents of these important documents?

Continue reading Estate Strategies: Michigan Snow Birds in Florida