Cottage Law and Cottage Succession Planning For Saving the Family Cottage and the Memories You Love

Cottage Law is specific to the unique requirements of family cottages, vacation properties, hunting lodges, or other types of shared property. Cottage Law is a fairly new practice area of law. It gained momentum in the early 1990s when states created Public Acts which provide the legal framework essential for changing the ownership relationship of cottage property owners. Michigan lawmakers created the “Michigan Limited Liability Company Act” (LLC) in 1993, and most states have since adopted similar limited liability company statutes. Cottage Law is a practice area of law firms which focuses on family cottage sharing and cottage succession planning.

Cottage Succession Planning involves developing a succession plan to pass the family cottage to children and future generations for their shared use and enjoyment. A succession plan is designed to protect the owner, family members and the cottage property from threats of a forced cottage partition lawsuit and to establish equitable rules for the future operation, shared use, financing and management of the family cottage.

7 key cottage-related concerns addressed by a cottage succession plan:

  • The possibility that ownership of a part of the cottage will pass into the hands of a non-family member as a consequence of death or a divorce.
  • What to do if a family member is not able or not willing to meet any or all financial commitments to the cottage.
  • The financial impact on the cottage if a family owner files bankruptcy, or a portion of the cottage’s interest is levied by a creditor of a family member.
  • How to solve internal conflicts between family members about how the cottage is operated, maintained and improved.
  • A family member wants to “cash out” their interest of the family cottage.
  • Disharmony and even possible litigation between siblings when parents are no longer around to mediate a peaceful resolution.
  • What happens when a child, or children cannot afford to keep the cottage.

In the past most parents relied on their estate plan to leave the family cottage equally to their children. While this is one way to pass on the family cottage property and transfer ownership to others, it presents financial, legal and emotional risks to both heirs and the family cottage. An estate plan cannot prevent a partition lawsuit, establish rules for the property’s future, nor enforce your dreams of keeping the cottage in the family. In Michigan, any time you transfer the title to a property you risk “uncapping” the assessed value of the property and chances are you will experience a dramatic increase in your cottage property taxes.

There are many reasons why it is difficult to share and pass on family cottages – but it doesn’t need to be difficult for you. The correct information and a “unique to your family” cottage succession plan can eliminate the risk and turmoil most families experience. Now is the time to begin viewing the ownership of your family cottage from a different perspective.

How You Own Real Estate

There are two ways to hold title to real estate:

-directly, or

-indirectly

Direct Ownership

Real Estate Law governs the rights and duties of “direct owners.” The granting of these rights and how real estate laws impose duties on direct owners often surprise cottage owners. It’s real estate law surprises which put the family cottage at risk. Real estate laws of direct ownership do not promote keeping the cottage in the family for multiple generations, and the threat of partition and turmoil among co-owners always exists.

Indirect Ownership

Entity Law, which are Laws of Trusts, Partnerships, Corporations, and Limited Liability Companies, govern the rights and duties of “indirect owners.” Entity Law is extremely flexible and accommodates the complex realities of commerce.

One of the first things you need to learn is how you hold title to your cottage property. Check the first paragraph of the deed. If it reads “Tenants in Common” you and other co-owners are “direct owners” and your cottage is always at risk. Any co-owner could force the sale of the family cottage using their right to file a “Right to Partition” lawsuit.

Typically, family cottages are governed by 600-year-old real estate laws. The American legal system is based upon English common law and the principle supporting 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 cottage to your children equally as “Tenants in Common” and one of your children would rather have the “cash value” of their inheritance and instead of a share of the family cottage, they can choose to end their relationship with their co-owners of the cottage. If siblings can’t afford to “buy out” a sibling and there is no way the cottage property can be divided equally, a court could order the sale of the property, and divide proceeds equally among the co-owners. Your dream of happy family times at the cottage for future generations is lost.

To protect the family cottage for future generations change the relationship of ownership from “direct owners” to “indirect owners” by creating a cottage Limited Liability Company (LLC). The LLC is governed by flexible Entity Laws which have provisions for multiple owners and generations of ownership by the family, versus Real Estate Laws which favor the rights of the individual real estate owner.

Indirect ownership of your cottage through an LLC allows you to use laws intended for business entities. You are able to customize an arrangement specifically for your family’s wishes. You are in control. You get to decide how the family cottage will be operated, financed, and most importantly, you are in control of how the cottage will pass from one generation to another.

When you create a cottage Limited Liability Company you transfer the cottage property title to your cottage Limited Liability Company. The LLC becomes the new owner of the cottage real estate, furnishings, boats, vehicles and other equipment. You, and future generations of your family, become “indirect owners” of the cottage. Instead of a “direct ownership” interest in cottage real estate property, you own “membership units” in the cottage LLC and are then able to transfer “membership interests” in the newly formed cottage Limited Liability Company to your heirs.

Work with an expert cottage law attorney to review your family cottage property as a whole. An attorney specializing in cottage law is in a position to advise you on short- and long-term strategies and legal structures to avoid “uncapping” your property, property tax appeals and related tax matters.

A cottage law attorney works with the family to develop a plan for the management of the cottage, to address scheduling the use of the cottage, how to equitably resolve power struggles between siblings for use during peak season months, how to finance and possibly endow the cottage, 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 cottage.

At the core of the Cottage Succession Plan and LLC is the Cottage Operating Agreement where rules are established for the management, shared use and future of the cottage. Care must be taken to accommodate the wishes of each owner because each owner has to be willing to sign the operating agreement once it is drafted.

You will need to choose between two types of LLCs based upon when you plan to implement the LLC. One is the “Immediate Cottage LLC” which becomes effective when cottage owners finalize their operating agreement, file Articles of Organization with their state, and sign a deed. The other is a “Springing Cottage LLC” which allows the cottage owner to maintain complete control during their lifetime and takes effect only when the cottage owner dies. The process of drafting the Cottage Operating Agreement is different for each type of LLC, but the goals of the agreement are the same. Your cottage law lawyer will advise you on the procedures for both types of LLCs.

The Cottage Operating Agreement determines everything about the cottage including, but not limited to:

  • Contributions to Expenses
  • Who Can Be An Owner
  • Renting
  • Maintenance
  • Scheduled Use
  • Annual budget
  • Capital improvements
  • Operating agreement amendments
  • Amendments to the Articles of Organization of the Company
  • Merging the company
  • Dissolving the company
  • Establishing a cottage use fee for members
  • Select or replace company managers
  • Mortgaging the cottage
  • Renting the cottage
  • Changing the company to a different legal form
  • Endowment contribution
  • Amend the operating agreement
  • Approve construction
  • Approve remodeling which alters the character of the cottage
  • Increasing members portion of property insurance, property taxes, and standard maintenance expenses
  • Selling the company
  • Selling the cottage

Circumstances need to be evaluated for each family and cottage property. The advantage you gain using an expert cottage law attorney is knowing you created a flexible legal entity to fulfill your hopes and dreams of protecting, preserving and saving the family cottage for use by all future generations.

A well designed cottage succession plan preserves the “experience” of the family cottage. All the memories that experience produces are worth more than money and may provide what you hoped for – a common and loving bond and closer relationship among grandchildren and great-grandchildren.

Begin the process of creating your cottage plan. Having a simple plan in place, which you can easily change and update, is better than the consequence of not having a protective cottage succession plan for your heirs.