Cabin Succession Planning for Your Family
Planning for the succession of your cherished family cabin is a crucial component of your overall estate planning. People often see it as a daunting task, and as such, may be reluctant to address difficult inter-family situations. In our experience, refusing to address the issue can result in a mess for the family to untangle.
Let’s consider an example. The Clark family enjoyed their northern Minnesota cabin for many years. The property was frequented by the Clarks, their three adult children and their grandchildren. Upon the death of both Mr. and Mrs. Clark, the children received the property. During their lifetime, the Clarks did not foresee any problems with the succession of ownership and management of the property. Over time, however, one adult child began paying the majority of costs related to the taxes and maintenance of the property and dedicated much time and effort toward maintaining the property. The other two adult children justify this by saying that their sister has the greatest ability to pay the costs due to her financial resources. Further, they claim that she uses the property more than they do, given her proximity and that of her children. The second adult child lives in New York and rarely uses the property with the exception of one week during the summer. The third adult child is an avid fisherman who uses the property a couple of times a month. However, he contributes little to the property. In addition, the cabin cannot accommodate all three children and their families at once. Given the differing perspectives, economic considerations, lack of space, and use conflicts, the three adult children are now forced to untangle these issues and come to a resolution.
Developing a cabin succession plan requires long-range planning that involves the entire family. Additionally, it may seem obvious, but cabin owners should confirm that each prospective new owner has an interest in becoming a cabin owner.
After it is determined that there is a common goal regarding succession of the cabin, a detailed plan should be established to ensure an efficient transfer of ownership, either during the lifetime or upon the death of the owners. The plan should address maintenance, cost sharing and budgeting, use, dispute resolution, creditor protection and other considerations relative to the situation and long-term plan. Because these prospective new cabin owners often have differing financial resources, family size, marital status, and opinions, these differences must be considered, as well.
Of course, there is no “one size fits all” planning option or form of ownership for the transfer and management of cabin property. The following are common forms of ownership used for purposes of cabin succession. Due to the scope of the article, tax considerations and the unique circumstances present in each cabin planning case cannot be addressed with each option.
Direct Transfer of Ownership. A direct transfer of ownership is made by conveying an interest in the property, by deed, to the new owner(s).
Pros. The primary benefit of a direct transfer of ownership is ease of conveyance. A direct transfer occurs by preparing and recording a deed transferring a cabin interest. There is little cost in a direct transfer.
Cons. Under certain circumstances, direct transfers can also have negative consequences. Direct transfers offer little or no protection from creditor claims or divorce of a new interest holder. The direct transfer method also lacks a method for dispute resolution, transfer of interests or protection when a new owner wants out. Due to the issues that can arise with common ownership from direct transfers, a co-tenancy or tenants-in-common agreement is often implemented to establish the rights, duties and general terms of the agreement between common owners.
Cabin Trusts. A trust agreement is another form of ownership and conveyance of cabin property. A trust is an agreement where a grantor transfers property to a trustee to be held, administered and distributed for the benefit of the trust beneficiaries. There are several forms of trusts that can be utilized for a cabin plan. Trusts can be either revocable or irrevocable, and there are several important considerations that may dictate which form of trust is selected.
Pros. Trusts are often utilized in a cabin plan because the trust agreement is an excellent tool to outline the terms of the agreement between the new cabin interest holders or trust beneficiaries. Trusts are also popular because estate planners are familiar with trust agreements and trusts have less legal formalities than business entities. Furthermore, trusts are commonly utilized because they are less expensive to draft and implement than more detailed business entity succession options.
Cons. The negative consequences associated with trusts generally deal with the lack of flexibility associated with administering a trust. Certain forms of trusts cannot be amended to address changes in circumstance among the beneficiaries or with the cabin property. Trusts also can be cumbersome for dispute resolution and property management. In addition, when compared to other forms of ownership, trusts can have inferior liability protection for family members.
Business Entities. The ownership of a family cabin can also be transferred in a business entity, such as a partnership or limited liability company (LLC). For purposes of this article, the discussion of the business entity option is limited to limited liability companies (LLC).
Pros. Several advantages in utilizing an LLC for cabin planning are as follows: flexibility in amending the controlling documents, ease of ownership transfer, established management provisions outlining the “basic rules” for the property (such as payment of operating expenses, procedures for transfer of member units or shares, maintenance, budgeting, governance, dispute resolution), creditor protection (protection from divorce, bankruptcy or lawsuit) and limited personal liability.
Cons. The primary disadvantages of using an LLC for cabin planning relate to formality and cost. The costs of establishing the entity and maintaining it are new expenses to the LLC owners, although rarely prohibitive. The formalities that exist with LLCs do not exist with other forms of ownership. These formalities, including annual registration with the state, maintenance of corporate records and, in some cases, tax returns, are required to keep the LLC entity in good legal standing.
Planning for the succession of your cabin will help you and your family not only avoid a mess but, will also provide peace of mind and foster communication within your family. If you already have a cabin succession plan, make sure you revisit the plan if a change in circumstance arises to ensure that the plan reflects the current intent of the parties.
This post was written by Trusts & Estates attorneys David Ness and Matt Jensen. If you have any questions or would like to discuss your cabin succession planning options, contact David at firstname.lastname@example.org or Matt at email@example.com.