This below article titled “Create a Plan to Pass On the Family Cottage” was in the September 6, 2011 edition of the Wall Street Journal. It describes a number of approaches that families and estate planners can use to keep homes in the family. Some highlights are below…
Before she died in June, Ms. Tanner and her three adult children worked with a lawyer to set up a limited liability company that would take ownership of the cottage once she passed away. Her children now jointly manage the LLC and follow the rules of an operating agreement that spells out things such as how often each sibling and his or her family gets to use the cottage.
The plan gave the family “a system for keeping the cottage financed in terms of upkeep and taxes and something that would keep it going beyond two future generations,” says Margaret Tewson, Ms. Tanner’s daughter.
If you’re enjoying that last summer outing to your vacation home this Labor Day weekend, it’s a good time to start thinking about creating a succession plan for the property. A detailed plan will make the transfer of ownership easier and establishes rules that will help prevent bitter family conflicts down the road, experts say.
The first step is figuring out who is — and isn’t — interested in inheriting the cottage, says David Fry, an attorney in Rockford, Mich., and co-author of “Saving the Family Cottage.” For instance, children who live far away from the property, don’t earn much or have a vacation home of their own may not be interested in the cottage.
Next, put together a plan that fits your family’s circumstances. If you’re passing the house down to one person, you typically can give it to him or her outright as a gift while you are still alive or bequeath it in your will. But if you’re passing property down to multiple individuals, it’s best to form an LLC or a trust that will own the home. These structures set ground rules for joint ownership and can prevent one co-owner from forcing a sale at any time, says Meghan S. Johnson, a Bayport, Minn.-based attorney specializing in cottage law.
A trust is usually the best choice for a family with young children, since it allows owners (typically the parents) to pass down the cottage to beneficiaries (typically their children), but appoint a trustee (usually an adult relative) to manage it.
An LLC is usually a better option for passing property to adult heirs, since it gives members more of an equal say in running and fixing up the property and it operates indefinitely. You can even set up a trust that, until your children reach a certain age, owns an LLC that, in turn, owns the cottage, says Mr. Fry.
It’s typically best to consult a lawyer when setting up an LLC or trust.
If you opt for an LLC, your heirs will be its “owners” and have to follow rules set by an operating agreement, says Mr. Fry. A good operating agreement spells out who makes decisions about the property (often a management committee composed of one member from each branch of the family) and how to deal with splitting up costs. It also can have more obscure provisions tailored to each family’s situation.
“You have to have an attorney like ours who can help you anticipate things you would not normally think of,” says Ms. Tewson.