Keeping the Cottage After You’re Gone

A blissful retreat can turn into an ugly war zone after the death of the family matriarch or patriarch. Cottage law can help manage, if not avoid, an all-out battle for the family vacation home.

Cottage law is an extension of the estate plan. Most estate plans will address many considerations, but rarely will it cover passing down the ownership and management of the family cottage.

Just as an estate plan attempts to eliminate the administrative uncertainties related to the property owner's incapacity and death, a cottage plan eliminates the complexities related to shared ownership, and provides structure and rules to keep the property in the family for generations to come.

Uncertainties in life and death can create problems, stress, and conflicts within your family that adversely impact the passing down of the family cottage. The practical goal in light of these likely complications of shared ownership is simple: Create a plan that protects the people you love, the place you love, and the life experiences and cottage memories you love.

Factors to consider

Developing a cottage plan requires forethought and a long-range view. In doing so, cottage owners should involve the entire family in the planning process. In addition, cottage owners should confirm that each prospective new owner actually has an interest in becoming a cottage owner. Too many times it is assumed that all surviving family members want ownership. However, factors such as financial considerations, geographic distance and time can impact the desire to become an owner.

After it is determined which family members are interested in eventually sharing ownership of the cottage property, a detailed plan should be established to ensure an efficient transfer of ownership, either during the owner's lifetime or upon the owner's death.

Finally, the plan should address important shared ownership considerations such as maintenance, cost-sharing and budgeting, use, dispute resolution, creditor protection and other considerations relative to the specific family's situation and long-term plan.

Because prospective new cottage owners often have unequal financial resources, family sizes, marital statuses and opinions, these differences must be considered while forming the cottage plan. If the plan fails to take these differences into account, chances are that a conflict will arise, jeopardizing best-laid plans for the heirs to peacefully share the family cottage.

Strategies

Transferring ownership of the family cottage can be done by a variety of methods. First, you can simply transfer ownership of a cottage to your family members by deed while you are still living. This method is an easy transaction at a low cost; however, it provides little or no protection from creditors for claims or the divorce of a new interest holder, for example. Plus, it lacks methods for managing the cottage going forward.

Second, cottage trusts are another method of transferring ownership. While a cottage trust can be an excellent tool for laying out a roadmap of agreement between the new cottage interest holders, it can also be inflexible and cumbersome when it comes to dispute resolution and property management.

A final option is to use limited liability companies (LLC) in cottage planning. LLCs offer the benefit of perpetual existence, flexibility for amending, limited personal liability and credit protection.

With all forms of ownership transfer, there may be income, gift tax and estate tax implications. As part of the cottage planning process, there must be a complete analysis of the estate, gift, income and property taxes to prevent unintended tax consequences.

The type of entity and the specific aspect of the structure of any plan are different for each family. Fortunately there are tools available to accommodate unique family situations.

Planning for cottage ownership is a critical part of planning your estate, because it ensures the succession of this key asset to family members well after the original owner has passed on. Planning early gives peace of mind that the succession objectives will be met and fosters communication among the family regarding its interest and intent. In addition to planning early, it is important to revisit the plan periodically or when there is a change in family status or circumstance.

If you are considering a cottage plan, you should contact a qualified estate-planning attorney who has experience in incorporating cottage plans into clients' overall estate plans.

Dan A. Penning is a nationally recognized expert on succession planning for family legacy assets. Dan regularly prepares sophisticated estate plans that emphasize probate avoidance, estate and tax planning, business planning and cottage law. You may contact Dan directly at dpenning@penninggroup.com, or contact any Penning Group associate in one of its three Michigan locations – Novi, Grand Rapids, and Suttons Bay.

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