Keeping the Family Cottage in the Family

You own the family cottage, farm or waterfront property that you and your loved ones have enjoyed for years. You want your loved ones to continue to enjoy the property after you are gone. Is there something that you can do? Absolutely!

You can keep the family cottage, farm or other real estate in the family with a trust. In your revocable living trust, you can set up separate trust to take effect at your death You can direct that after your death, your death trustees transfer the family cottage, farm or other real estate to the cottage or homestead trust.

You can also direct that your trustees set aside a certain sum of money out of the other trust assets into the cottage or homestead trust along with the real estate. The funds would be used to pay taxes, insurance, utilities, repairs and maintenance for a period of time or maybe indefinitely. Your loved ones could be able to use the cottage at no cost to them. This trust could hold the cottage for successive generations without being a financial burden on the family.

You can include a mechanism in the trust so for the scheduling of the use of the real estate by your loved ones. Do they use the property a week at a time or for weekends also? Do they have the same week each year like some timeshares or do they rotate the weeks among the beneficiaries?

If you do not provide a sum of money for the payment of expenses, there should be a mechanism for the contribution of funds by the beneficiaries in order to pay taxes, insurance, utilities, repairs and maintenance of the real estate. You could provide that there is a usage fee for the beneficiaries’ use of the real estate. Or you could provide for an assessment mechanism that all the beneficiaries would have to contribute.

Whenever you require your beneficiaries to contribute to the expenses of the real estate, you have to recognize that there may be some beneficiaries who not want to contribute toward the expenses, or failing to contribute so you should put in a mechanism to provide for that. You could set it up so that the non-paying beneficiary’s share of the trust decreases if they fail to pay or that they no longer are a beneficiary or that they are bought out of the trust by other beneficiaries. Or the trustees could keep a tally so that upon ultimate termination of the trust and distribution of trust shares, that the amounts unpaid about would be offset against that beneficiary’s eventual share.

If you want to start giving away a portion of the real estate during your lifetime, another option would be to set up a family limited liability company (LLC). With a family LLC, you can remove the property from your estate by gifting shares of the membership interests in the LLC to your loved ones during your lifetime. And then after your death, any ungifted membership interests in the LLC would then be distributed to your loved ones.

One of the biggest benefits of an LLC is that you can stay in control of the real estate during your lifetime by setting up the LLC as being manager-managed and appointing yourself as the manager. During your lifetime, you can continue to decide how the real estate is going to be used, even if you have given away all of the membership interests in the LLC. You can still stay in charge of and control the property in the LLC.

Just like with a cottage of homestead trust, you could also contribute a sum of money to the LLC to pay for taxes, insurance, utilities repair and maintenance. Or you could set up at mechanism that the members of the LLC had to contribute towards expenses through usage fees or assessments. Also like with the trust, you should have a mechanism if a member does not pay their share of the expenses.

But what if Mom or Dad has already passed away and did not set up a cottage or homestead trust or family LLC for the family real estate? You now own the property with your siblings. You are all on the deed. Some of you use it more than others. How do you manage the real estate and pay the bills and keep the real estate in the family,?

If you each own share of the property, there are some potential risks that you are accepting. Firstly, if there was a slip and fall and on the property and there was a substantial judgment for the injury, all the members would be potentially at risk for paying for the entire judgment out of their own personal assets.

Also, if you have to take out a mortgage on the property to pay for repairs or improvements, the mortgage lender will typically require that all owners sign on the note, jointly and severally. This means that if there is a default of note to the bank, any one or more of the co-owners may be required to pay off the entire debt.

If any of the co-owners get sued, their share of the of the real estate could be seized by a judgment creditor, who could force a sale of the property, which would not keep it in the family. Also if one of the co-owners gets divorced, do you want to have a new partner who is the ex-spouse of one of your siblings.

If all of the co-owners are in agreement, you could set up a family LLC after Mom or Dad’s death. And you can have the LLC manager-managed by one or more of the co-owners for the benefit of all the co-owners.

With the family LLC holding the real estate, you could put in provisions that if one of the co-owners gets sued or divorced, that the ex-spouse or other creditor could not attach the real estate. They only would have what is called a charging order which would only entitle them to any distributions that would be made out of the LLC. They could not force the sale of real estate in order to pay the debt.

Another benefit of the family LLC is if there is a catastrophic creditor from something like a slip and fall on the property, none of the members would typically be at risk for the liability. The judgment creditor would generally only be able to go after the value of the real estate and other assets of the LLC, but not after the personal assets of each of the members.

You can also have the members of the family LLC enter into a comprehensive buy-sell agreement which could include very specific provisions of who can be a member. Do you want to keep the members within the bloodline or do you want to allow spouses as members? Do you want to allow the members to be able to put their membership interest into their own trust. With a comprehensive buy-sell agreement, you can control who your partners are going to be.

You can also create a mechanism for expense contributions such as assessments or user fees. You can include a provision in the buy-sell agreement that if a member does not contribute, that would trigger of the buyout of the delinquent member’s share of the LLC.

A trust or a family LLC are just two mechanisms that would allow you to manage family real estate and keep it in the family.

By Matthew M. Wallace, CPA, JD

Published edited May 14, 2017 in The Times Herald newspaper Port Huron, Michigan as: Keeping the family cottage in the family after you are gone

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