A generation ago, planning for the retention and management of the family cottage (or cabin or camp) through multiple generations took the form of a trust that would continue to own the property and that laid out rules for its ongoing use and maintenance. These “cottage trusts” had their limitations, though, as they were relatively inflexible and could continue for only a few generations.
Attorneys then began to experiment with other cottage succession tools, including various forms of partnerships, corporations and limited liability companies (“LLCs”). The goal with each of these entities was to enable successive generations to keep the cottage and to manage it as smoothly as possible. Unlike a trust, however, these entities allowed for the possibility of ownership in perpetuity.
Some of these entities worked better than others, and it wasn’t long before the LLC emerged as the best tool for the job. The benefits of an LLC include perpetual life, simplified entity recordkeeping requirements, opportunities for creativity and flexibility to adjust for changing circumstances, pass-through taxation of income and losses, and protection of personal assets from company creditors.
The cottage succession planning landscape changed again when Michigan recently revised its real property tax laws to allow individuals and trusts (but NOT limited liability companies) to hand down residential properties at death without triggering the uncapping of property tax assessments. As you can imagine, preventing a property tax uncapping at each generation could be of tremendous value, especially if the cottage has already been in the family for a long time or it sits in a particularly desirable location.
The failure of the state legislature to include LLCs in this relief from property tax uncapping caused attorneys to revert to using trusts, once again, as the preferred method for preserving the family cottage down through the generations. Trusts still have their limitations, however, which has spurred creative planners to develop hybrid cottage succession plans coupling traditional cottage trusts with LLCs.
In the hybrid cottage succession plan, a trust is created to hold title to the cottage down through multiple generations. The twist in the hybrid arrangement is that the trustee, at the deaths of the creators of the trust, sets up an LLC and utilizes that LLC to maintain the cottage, schedule its usage, etc. An LLC operating agreement, setting forth management details decided by the creators of the trust, is attached to the trust document.
The beauty of the hybrid plan is that it avoids property tax uncapping at each successive generation, plus it allows for all the creativity and flexibility that can be built into an LLC operating agreement.
If you would like to discuss succession planning for a vacation home that is precious to your family, please give us a call.