Cottage Law is specific to the unique requirements of family cottages, vacation properties, hunting lodges, or other types of shared ownership. Cottage Law is a relatively new practice area of law. It gained momentum in the early 1990s when states created public laws that provide the essential legal framework for changing the ownership relationship of country home owners. Michigan lawmakers created the “Michigan Limited Liability Company Act” (LLC) in 1993, and since then most states have adopted similar limited liability company statutes. Cottage Law is a law firm practice area that focuses on family farmhouse swapping and farmhouse succession planning.
Cabin Succession Planning It involves developing a succession plan to pass the family cabin to children and future generations for their shared use and enjoyment. A succession plan is designed to protect the owner, family members and property of the cabin from the threats of a lawsuit for forced partition of the cabin and to establish equitable rules for future operation, sharing, financing and management of the family cabin.
7 key cabin-related concerns addressed by a cabin succession plan:
- The possibility that the ownership of part of the house passes into the hands of someone who is not a member of the family as a result of death or divorce.
- What to do if a family member cannot or does not want to fulfill some or all of the economic commitments of the cabin.
- The financial impact on the cabin if a family owner files for bankruptcy, or a portion of the interest on the cabin is collected by a creditor from a family member.
- How to resolve internal conflicts between family members about how the cabin is operated, maintained and improved.
- A family member wants to “cash in” his interest in the family cabin.
- Lack of harmony and even possible litigation between siblings when the parents are no longer present to mediate a peaceful resolution.
- What happens when a child or children cannot afford to keep the cabin?
In the past, most parents relied on their estate plan to leave the family home equally to their children. While this is one way of passing on ownership of the family cabin and transferring ownership to others, it presents financial, legal and emotional risks for both the heirs and the family cabin. An estate plan cannot prevent a partition lawsuit, set rules for the future of the property, or enforce your dreams of keeping the cabin in the family. In Michigan, every time you transfer title to a property, you run the risk of “uncovering” the property’s appraised value and are likely to experience a dramatic increase in property taxes on your cabin.
There are many reasons why sharing and passing on family homes is difficult, but it doesn’t have to be for you. The right information and a “just for your family” cabin succession plan can eliminate the risk and confusion most families experience. Now is the time to start looking at the family cabin property from a different perspective.
How You Own Real Estate
There are two ways to maintain title to real property:
The Real Estate Law regulates the rights and duties of “direct owners”. The granting of these rights and the way real estate laws impose duties on direct owners often come as a surprise to cabin owners. It is the surprises of the real estate law that put the family home at risk. Directly owned real estate laws do not promote keeping the cottage in the family for several generations, and there is always the threat of partition and confusion among the co-owners.
The Entities Law, which are the laws of trusts, partnerships, corporations and limited liability companies, govern the rights and duties of “indirect owners.” Entity Law is extremely flexible and adapts to the complex realities of business.
One of the first things to learn is how you own the title to your cabin. See the first paragraph of writing. If it says “Joint tenants,” you and other co-owners are “direct owners” and your cabin is always at risk. Any co-owner could force the sale of the family cabin using his right to file a “right to partition” lawsuit.
Family cottages are generally governed by 600-year-old real estate laws. The American legal system is based on English common law and the principle behind the “right to partition” is that no person can be required to own property. Think about that for a minute. If you plan to pass on the family cabin to your children equally as “joint tenants” and one of your children prefers to have the “cash value” of your inheritance and instead of a part of the family cabin, you can choose to terminate your relationship with his co-owners of the cabin. If the siblings cannot afford to “buy” a sibling and there is no way the cabin property can be divided equally, a court could order the sale of the property and divide the proceeds equally between the co-owners. His dream of spending happy family moments at the farmhouse for future generations has been lost.
To protect the family cabin for future generations, change the ownership relationship from “direct owners” to “indirect owners” by creating a limited liability company (LLC). The LLC is governed by flexible entity laws that have provisions for multiple owners and generations of family ownership, versus real estate laws that favor the rights of the individual real estate owner.
Indirect ownership of your cabin through an LLC allows you to use laws intended for business entities. You can customize an arrangement specifically for your family’s wishes. You have the control. You can decide how the family cabin will be operated, financed, and most importantly, you are in control of how the cabin will pass from one generation to the next.
When you create a Cabin Limited Liability Company, you transfer ownership of the cabins to your Cabin Limited Liability Company. The LLC becomes the new owner of the cabin, furniture, boats, vehicles, and other equipment. You and future generations of your family will become “indirect owners” of the cabin. Instead of a “direct ownership” interest in the cottage real estate, you own “membership units” in the cottage LLC and then you can transfer “membership interests” in the newly formed cottage Limited Liability Company to their heirs.
Work with an experienced cabin law attorney to review your family cabin ownership as a whole. A skilled craft law attorney is in a position to advise you on short and long term legal structures and strategies to avoid “uncovering” your property, property tax appeals, and related tax matters.
An attorney specialized in rural law works with the family to develop a plan for the management of the cabin, to address the scheduling of the use of the cabin, how to equitably resolve power struggles between siblings for use during the peak season months, how to finance and possibly equip the lodge, and develop a financial plan for a “graceful exit” to accommodate a sibling who does not want to share in the use, care, and expense of the family lodge.
At the core of the Cabana and LLC Succession Plan is the Cabana Operating Agreement, which sets the rules for the management, co-use and future of the cabana. Care must be taken to accommodate each owner’s wishes because each owner must be willing to sign the operating agreement once it is written.
You will have to choose between two types of LLC based on when you plan to implement the LLC. One is “Immediate Cottage LLC,” which takes effect when cottage owners finalize their operating agreement, file articles of organization in their state, and sign a deed. The other is a “Springing Cottage LLC” which allows the owner of the cottage to maintain complete control during its lifetime and takes effect only when the owner of the cottage dies. The process for drafting the Cottage Operating Agreement is different for each type of LLC, but the objectives of the agreement are the same. Your craft law attorney will advise you on the procedures for both types of LLC.
The Cottage Operating Agreement determines everything about the Cottage, including but not limited to:
- Contributions to expenses
- Who can be an owner?
- Scheduled use
- Annual budget
- Capital improvements
- Amendments to the operating agreement
- Modifications to the Company’s Bylaws.
- Merge the company
- Dissolving the company
- Set a cabin usage fee for members
- Select or replace company managers
- Mortgage the cabin
- Rent the cabin
- Change the company to a different legal form
- Endowment contribution
- Modify the operating agreement
- Approve construction
- Approve renovations that alter the character of the cabin.
- Increase the member’s share of property insurance, property taxes, and standard living expenses
- Sell the company
- Selling the cabin
You need to assess the circumstances for each cabin and family property. The advantage you get with an experienced cabin law attorney is knowing that you created a flexible legal entity to fulfill your hopes and dreams of protecting, preserving and saving the family cabin for use by all future generations.
A well-designed cabin succession plan preserves the family cabin “experience.” All the memories the experience produces are worth more than the money and can give you what you expected: a common and loving bond and a closer relationship between grandchildren and great-grandchildren.
Begin the process of creating your cabin plan. Having a simple plan in place, which you can easily change and update, is better than the consequence of not having a protective cabin estate plan for your heirs.