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Plan Before Bequeathing A Shared Family Cottage
GRAND RAPIDS — The family cottage that was the source of joy for siblings when they were young can become a source of rivalry when they inherit it.
McShane & Bowie Attorney Michelle Anthes, who specializes in estate planning, trust administration and business law, often adds a “cottage succession planning” section to the estate plans she writes for her clients. A cottage succession plan establishes a legal arrangement that keeps a cottage in the family for generations to come.
“If I see a second home on their checklist, I start asking the questions right away,” Anthes said. “I came across the issue of cottage succession planning while sitting down with people and doing their estate plan and contemplating the dispositive provisions of their trust, specifically with this very large asset.”
Statistics show that 75 percent of Americans do not have an estate plan in place. A lot of them, however, do have vacation homes or cottages. Anthes said she and the other real estate attorneys in her firm saw this as an ever-growing problem. It was an area of estate planning that wasn’t being developed, she said. So they formed a group and started talking with clients about the importance of cottage succession planning and the issues that can arise for cottage owners and the family members who inherit the property.
A lot of people have not only financial ties but also emotional ties to a cottage. Whether a couple has two, three or five children, when they want to leave their assets equally to those children, the problem is that not all the siblings are necessarily going to view disposition of the family cottage the same way, Anthes said.
“Some are going to want to keep it, some are going to want to sell it, and the ones that want to keep it may not have the money to buy out the ones who want to sell it,” she explained. “If they all decide to keep it, then they have to decide how they’re going to share the use of it. Who gets it on the Fourth of July? Who’s going to get it on Memorial Day and Labor Day?”
There are plenty of other issues that need to be worked out beforehand, too. How will the capital gains tax be paid when the property is transferred? How will family members share the expenses of ongoing operation and maintenance, as well as annual property tax payments? What if a sibling is late in paying his pro-rated share of the expenses? Will family members be allowed to bring guests or rent out the cottage to non-family members? Can a family member redecorate or renovate the cottage on a whim, or will it require a group vote? Will pets be welcome at the family cottage? If a sibling dies, will ownership revert to his or her spouse?
There are a lot of scenarios that can crop up, and that’s what McShane & Bowie attorneys want their clients to think long and hard about. If relationships between siblings aren’t the best, and things aren’t spelled out clearly in a cottage co-ownership agreement, small issues can erupt into huge issues, creating ill will and mistrust and, in extreme cases, the dissolution of family relationships.
“Unfortunately, the one thing we hear from a lot of clients is: ‘My kids never fight. They’ll be fine.’ That’s the one thing they’re really wrong about,” Anthes said.
Typically, when a cottage or other vacation property in Michigan is transferred to the next generation, it’s owned by family members under a tenancy-in-common agreement. But problems can arise for some families under that ownership model, Anthes pointed out, primarily because if one sibling wants out, he can force a partition sale and transfer his interest in the cottage to anyone he wants. Under a tenancy in common agreement, a member can use the cottage anytime, regardless of his percent of ownership, but he can’t be forced to pay rent to any other member. If the family doesn’t have a planned, agreed-on occupancy schedule, any member may rent their vacation time out without the consent of the others. Also, a family member can’t demand that other members reimburse him for any money he spends on cottage improvements.
An alternative form of cottage succession planning is through the formation of a limited liability corporation, Anthes said. The heirs can develop an operating agreement for the LLC that includes rules everyone must abide by.
One of Anthes’ client families, for example, has a vacation home on Lake Michigan that is its single-largest asset. Of the couple’s three children, one is financially secure and able to cover his share of the cottage. The two other children can’t afford to pay for it. The parents have a nest egg that they don’t expect they’ll have to touch, so they’ve decided to create an LLC in which each of the kids will be members. They will have to sign an operating agreement and be bound by the terms of it. The parents also established an endowment to pay cottage expenses for 10 years.
For some people the answer might be an LLC, and for others it might be a qualified personal residence trust or some other legal tool.