Keeping the family cottage in the family
In Michigan, going Up North to the family cottage is a great way to escape for many families. Long days at the lake, on the ski hill or at “deer camp” can make for wonderful memories. Many families want to continue this tradition by transferring their cottage to the next generation, but that transfer can be tricky, especially in large families.
With proper planning and communication, however, you can pass on your dream cottage to your children in a way that it will not become a nightmare for them.
The first step is to determine if your children will be able to use the cottage. Do they still live close enough to use the cottage? Will their lifestyle allow them to enjoy the cottage? Can they afford a cottage? Before you think about transferring the cottage, you should consider if that’s even the right move.
The next question is how best to transfer the property. Many people wish to retain control during their lifetimes and pass on the property without increasing the cost of ownership. If the property has been in the family for many years and the value has appreciated, one concern is keeping the taxable value capped so the property taxes do not make the cottage unaffordable for the next generation. Under the Michigan Property Tax Act, transfers to family members within one generation or to grandchildren will not uncap the property. Thus, you can pass the cottage on to your parents, your siblings, your children, or your grandchildren and the taxable value will not change. The transfer can be done through a trust or to these family members directly in a way that allows you to retain control.
Transferring the property into a trust where the parents are the trustees and initial beneficiaries will allow the parents to retain control over the property, will not cause the taxes to uncap and will allow for an easy transition to the next generation.
A second option is a “ladybird deed,” which is a delayed transfer deed. The property remains under the control of the original owners and only moves to the next generation when the original owners have all passed away. This method prevents the property taxes from uncapping, retains control for the original owners, preserves the Medicaid exemption for the property, if any, and preserves the original owners’ flexibility. Many owners use ladybird deeds to transfer cottage properties to their children.
The third issue concerns management of the cottage once it is passed on. If the cottage is being passed on to multiple children and/or their spouses, decisions regarding the use of the cottage and financial support for the property become important. A trust, or a co-tenancy agreement where no trust is used, can settle issues with respect to allocation of use, house rules regarding use of the cottage, rules regarding guests, pets and rental of the cottage to third-parties, collection of “dues” from the owners, payment of property taxes, insurance, association fees, maintenance and repair, etc. All of these issues can be addressed up front in a trust or co-tenancy agreement before conflicts arise.
You and your family have enjoyed your cottage for many years, and your goal in passing the cottage on to your family is to allow them to enjoy it for many more.
Deciding on the right method of transfer and the terms for use of the cottage once it is passed on can be key factors in determining whether you are passing on a dream or a nightmare.