What you might not know about passing on your cottage
For many Michiganders — and Midwesterners in general — getting away to a cottage “up north” is a time-honored tradition.
Families create wonderful memories at their cottages as children grow up. But what happens when it’s time to pass the cottage down to the next generation? Too often, families forget to think about how the property will be shared between family members. Poor planning can commonly result in avoidable conflict, expense and even court-ordered sale of the property. Once a place of respite, the family cottage can become a source of friction and even litigation.
When multiple people own a property in common, as is often the case when a cottage is passed down, any owner can bring an action in court called “partition” against the other owners or force a sale of the property.
Assuming the property is large enough and suited for it, a partition divides the physical property between all of the owners. This means splitting the property into multiple pieces with everyone receiving a fraction. In the case of a small lakefront cottage, splitting the property in this way is impossible; no one can use half a kitchen. As an alternative, a court may order that the property be sold and divide the proceeds among the former owners. Neither outcome is what parents usually have in mind when they pass a cottage on to their children. The expenses associated with resolving the dispute can mount quickly, and in the process, the dispute usually damages relationships.
Understandably, this can happen in even the closest of families. Different family members may want to participate in cottage life in different ways. Some children, perhaps surprisingly to parents, may view the cottage as more of a burden. Others may want to be involved as much as possible and see the cottage — and decisions about it — as deeply tied up in their own identity and childhood (and others may simply need cash from a sale). Most often, conflicts arise over issues such as:
Use of the property
Scheduling usage during prime summer months can be a challenge, particularly when multiple family lines are involved. Questions can arise about which family members have the right to set and enforce ground rules for cottage use. Other stress points might include conflicts regarding whether to rent the cottage or whether to allow friends to stay at the cottage when no family members are there. Even small disputes over broken faucets, empty paper towel holders or damaged furniture can lead to bitter long-term battles.
Recent changes in Michigan’s property tax laws enable families to transfer ownership of family cottages to the next generation without incurring the steep increase in property taxes that would have resulted under prior law.
However, the property taxes associated with ownership of a family cottage still can be significant and allocation of the tax burden can be problematic.
In addition, changes to the federal income tax deduction for state property taxes have increased the overall tax burden on people who own family cottages.
Michigan’s new family-friendly property tax exemptions generally do not apply if the cottage is transferred to a family limited liability company, so it can be harder to develop governance structures that address these issues ahead of time.
Maintaining the property and expenses
Maintaining a family cottage can be expensive; property taxes are not the only expense.
Insurance, upkeep, utilities and other expenses can cost thousands of dollars each year. Arguments might arise over questions including: What counts as necessary work on the property? If maintenance is needed, who will actually do the work? If upgrades are aesthetic (e.g. putting in landscaping, redecorating the cottage, etc.), who will make those decisions? How will those costs be shared? Should the person who decided the work was needed shoulder the financial load? What if some family members use the property disproportionately?
Transfers and sales
Cottage ownership is not static. Co-owners may need or want to sell their interest in the property or may die with their ownership interest as a part of their estate.
Disagreements may arise regarding whether other family members have an option or even an obligation to purchase the interest of a departing owner. Difficulties may result if a co-owner wants to sell or transfer their ownership to a spouse or third party.
If you’re in a cottage conflict, what can you do? Most often, the best solution involves an agreement between the family members that details the answers to these common issues. Although, depending on your family dynamics, finding common ground may be a challenge. A partition action could be necessary to bring everyone to the table for resolution or to guide the parties through a separation of ownership.
These issues might seem overwhelming and tensions may be running high, but the first step to any successful solution is to talk through the problem. Whether you are in the role of a parent passing a cottage down or a sibling who has received a property, it is essential to learn what each member of the family wants from the cottage. Done well, this conversation can also be an opportunity to warmly reminisce about the memories your family shared at the cottage.
Once you have an idea of everyone’s wishes, you can either create a plan or seek the assistance of the court. An attorney can help your family develop a personalized, formal plan that is both flexible and strong enough for your needs or walk you through the process of partition.
The earlier you address the tensions or even potential tensions, the more easily common solutions can be found.
Sara Lachman is a member at Miller Johnson, and Jonathan Beer is an associate in the Private Client Group at Miller Johnson.