Saving the Family Cottage: A Guide to Succession Planning for Your Cottage, Cabin, Camp or Vacation Home. (Stuart J. Hollander, Rose Hollander & David S. Fry, 3rd Edition, Nolo 2009)
For many of us in Summit County, the ultimate dream is to own a family home in our beloved ski country. (Other families, of course, love the lakeshore or a rocky bluff by the ocean.) Ownership of a ski home represents both a financial and emotional investment, taking many years of hard work, care and planning. Watching children and grandchildren grow up and learn to ski. Sitting by the warm and glowing fire. Sharing a sumptuous holiday meal. These are the joys that accompany success.
But eventually, our thoughts turn to determining a way to ensure the ability of our family to return to the place of their happiest moments, to toast our memory when we are gone. While a ski chalet can bind a family together across generations, without proper planning it can also tear a family apart.
The authors (Stuart Hollander is now deceased) have written a thoughtful and comprehensive treatment – replete with horror stories they’ve encountered in their specialized legal practices of what can go wrong. They also offer solid advice on how to prevent it.
In the absence of a specified, different method, real estate is ordinarily passed to multiple owners in the next generation through the most common form of co-ownership; tenants-in-common. (Joint tenancy is essentially a form of tenancy-in-common, except that upon death surviving joint tenants automatically acquire the deceased joint tenant’s interest, whereas the interest of a tenant-in-common passes upon death via her estate.) The authors devote a chapter to the nine common-law “rules” of a tenancy-in common. These rules describe the various rights and responsibilities that co-owners have with and toward one another.
Fundamentally, as tenants-in-common, each owner has an undivided proportional interest in the property equal to each of the other co-owners’ interests. He has the right to freely use the entire property and to transfer or encumber his separate interest. There are arcane procedures regarding maintenance and expense-sharing. Without disagreements, tenancy-in-common may work, at least for a while. But when an intractable dispute arises between co-owners, a co-tenant may resort to the common-law right of partition. Apparently first recognized in England as early as 1540 during the reign of King Henry VIII, partition was imported here when our country was founded, and is recognized in one form or another in every state.
Historically, a partition action has resulted in a court-ordered legal division of the property into as many subdivisions as there are owners. (The authors describe one such seven-year legal battle from Connecticut in the 1970s, complete with attacks against the court-appointed mediator by one co-owner’s German shepherds.) Subdivision may work for large tracts of land, but it’s often impossible to practically divide more modern forms of property, such as a shopping center, apartment building or limited-acreage home. So today, a partition action will more likely result in a forced sale, with legal expenses being taken off the top. And there is no real defense to a partition action. The remedy is virtually automatic.
Co-tenancy is a form of direct property ownership. The deed of conveyance establishes the type of ownership and your rights are established by the common law. In contrast, effective property succession plans rely on indirect ownership – in which an entity (corporation, trust, LLC, etc.) owns title to the property and the governing documents of the entity determine the beneficial owners’ respective rights and responsibilities.
The documents, for example, can require an ex- or surviving spouse to sell an interest back to the entity. Restrictions on transfer can render largely futile attempts by an owner’s creditors to attach the property to satisfy a judgment. And unlike in a co-tenancy, maintenance responsibilities can be spelled out in the governing documents and provide for recalcitrant owner remedies, such as loss of use.
A good succession plan:
Most importantly, the succession plan should serve as a tailored solution that reflects the values of the founders – and their family members – while allowing for periodic amendment to reflect changing needs and circumstances.
After reviewing the various forms of entities around which to form a cottage succession plan, the authors settled on the Limited liability Company (LLC) as the best choice. Trusts are unwieldy and undemocratic, investing too much control in the trustee. Partnerships don’t provide sufficient liability protection. A corporation can do the job. But with the advent and increased public and judicial acceptance of the LLC (and its inherent flexibility), it emerges as the structure of choice.
Clearly, for those who are intent on perpetuating the family ski property as part of their legacy, there is no substitute for a thorough and well-drafted plan. But when should it be implemented? There are two choices: immediately or with a “Springing LLC” as part of an estate plan, where the basic documents are created now but execution is delayed until after the founders’ deaths.
One benefit of starting early is that membership units can be gifted during the founders’ lifetimes and the value of those units can be removed from their estates. But great care must be taken to ensure that the operating agreement is drafted such that gifts are completed gifts for estate tax purposes. And all the T’s must be crossed and I’s dotted to ensure that the IRS cannot successfully attack the valuation of the units.
The book concludes with a chapter on what the authors call the “Ultimate Gift” for families who can afford it – a trust fund endowment consisting of financial assets earmarked for underwriting the ongoing maintenance expenses of the home in perpetuity.
I found Saving the Family Cottage a wonderful source for wealth management ideas – even if you don’t currently own your dream ski home. While the book is laser-focused on a discrete issue of importance, it also invites families to explore and accomplish the larger issues of values and legacy that all families face. As with the construction materials you select for building your homes, begin with solid techniques for establishing your family legacy – be they for a cottage or a college-education trust fund – and you stand a much better chance of creating a structure that’s built to last.
Steve Smith, Principal of Right Path Investments is here to guide you with preparations to take your next step. If you're ready to take that step, schedule some time for a one on one with Steve today.