The Cabin Law is specific to the unique requirements of family cabins, vacation properties, hunting lodges, or other types of shared ownership. Cottage Law is a fairly new area of legal practice. It gained momentum in the early 1990s when states created Public Laws that provide the essential legal framework for changing the ownership relationship of cottage 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 practice area of law firms that focuses on family home exchange and cottage succession planning.
Cabin Estate Planning involves developing an estate plan to pass the family home to children and future generations for their shared use and enjoyment. An estate plan is designed to protect the owner, family members, and ownership of the cabin from the threats of a lawsuit for forcible division of the cabin and to establish equitable rules for future operation, sharing, financing and the administration of the family cabin.
7 key cottage-related concerns addressed by a cottage succession plan:
- The possibility of ownership of part of the house passing into the hands of a non-family member as a result of death or divorce.
- What to do if a family member is unable or unwilling to meet some or all of the cabin’s financial commitments.
- The financial impact on the cabin if a family owner files for bankruptcy, or if a portion of the cabin interest is leveraged by a creditor of 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 “retire” his interest in the family country house.
- Disharmony and even possible litigation between siblings when the parents are no longer around to mediate a peaceful resolution.
- What happens when a child or children cannot afford to maintain the country house?
In the past, most parents relied on their estate plan to leave the family farmhouse equally to their children. While this is a way to convey ownership of the family farmhouse and transfer ownership to others, it presents financial, legal, and emotional risks to both the heirs and the family farmhouse. An estate plan can’t prevent a partition lawsuit, set rules for the future of the property, or enforce your dreams of keeping the farmhouse in the family. In Michigan, every time you transfer title to a property, you risk “uncapping” the property’s assessed value and likely experience a drastic increase in property taxes on your farmhouse.
There are many reasons why it’s hard to share and stream family farmhouses, but it doesn’t have to be hard for you. The right information and a “just for your family” estate plan can eliminate the risk and confusion most families experience. Now is the time to start looking at your family farmhouse property from a different perspective.
How do you own real estate?
There are two ways to have title to real estate:
-directly, or
-indirectly
direct ownership
The Real Estate Law governs the rights and duties of the “direct owners”. The granting of these rights and how real estate laws impose duties on direct owners often surprise country house owners. It’s real estate law surprises that put the family home at risk. Directly owned real estate laws do not encourage keeping the farmhouse in the family for multiple generations, and there is always the threat of division and confusion among co-owners.
indirect ownership
The Entity Law, which are Laws of Trusts, Partnerships, Corporations and Limited Liability Companies, govern the rights and duties of “indirect owners”. The Entity Law is extremely flexible and adapts to the complex realities of commerce.
One of the first things you need to learn is how you hold title to your country house. He reviews the first paragraph of the script. If it says “Tenants in Common”, 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 home using their right to file a “Right of Partition” lawsuit.
Family cabins are typically governed by 600-year-old real estate laws. The American legal system is based on English common law, and the principle behind the “right of partition” is that no one person can be required to own property. Think about that for a minute. If you plan to pass on the family farmhouse to your children equally as “tenants in common” and one of your children prefers to have the “cash value” of your inheritance and rather than a portion of the family farmhouse, you may choose to end his relationship with his co-owners of the country house. If the siblings cannot afford to “buy out” a sibling and there is no way the cabin ownership could be divided equally, a court could order the property to be sold and the proceeds divided equally among the co-owners. Their dream of happy family times in the country house for future generations has been lost.
To protect the family farmhouse for future generations, change the ownership relationship from “direct owners” to “indirect owners” by creating a limited liability company (LLC) for the farmhouse. 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 farmhouse through an LLC allows you to use laws intended for business entities. You can customize an arrangement specifically for your family’s wishes. You are in control. You can decide how the family farmhouse will be operated and financed, and most importantly, you are in control of how the farmhouse will be passed down from one generation to the next.
When you create a Cabin Limited Liability Company, you transfer title to the cabin to your Cabin Limited Liability Company. The LLC becomes the new owner of the cottage, furniture, boats, vehicles and other equipment. You and future generations of your family become “indirect owners” of the cabin. Instead of a “direct ownership” interest in the real estate of the cabin, you own “membership units” in the cabin’s LLC and can later transfer “membership interests” in the newly created cabin Limited Liability Company. formed to his heirs.
Work with an experienced farmhouse law attorney to review your entire family farmhouse ownership. An attorney specializing in rural law is in a position to advise you on short- and long-term legal strategies and structures to prevent your property from being “discovered,” property tax appeals, and related tax matters.
A cabin law attorney works with the family to develop a plan for cabin management, address scheduling cabin use, how to equitably resolve sibling power struggles for use during peak season months, how to finance and possibly equip the farmhouse and develop a financial plan for a “fancy getaway” to accommodate a sibling who does not want to share in the use, care and expenses of the family farmhouse.
The core of the Cottage Succession Plan and LLC is the Cottage Operating Agreement, which sets forth rules for the management, sharing, and future of the cottage. Care must be taken to accommodate the wishes of each owner because each owner must be willing to sign the operating agreement once it is written.
You will need to choose between two types of LLC based on when you plan to implement the LLC. One is “Immediate Cottage LLC,” which goes into effect 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 retain full control for their lifetime and takes effect only upon the death of the cottage owner. The Cottage Operating Agreement drafting process is different for each type of LLC, but the objectives of the agreement are the same. Your rural law attorney will advise you on the procedures for both types of LLCs.
The Cabin Operating Agreement determines everything about the cabin including, but not limited to:
- Contributions to Expenses
- Who can own
- Rental
- Maintenance
- scheduled use
- annual budget
- capital improvements
- Modifications to the operating agreement
- Modifications to the Bylaws of the Company
- merging the company
- dissolution of the company
- Establishment of a fee for the use of the cabin for members
- Select or replace company managers
- mortgage the cabin
- rent the cabin
- Changing the company to a different legal form
- endowment contribution
- Modify the exploitation agreement
- approve construction
- Approve remodeling that alters the character of the cabin.
- Increased members’ portion of property insurance, property taxes, and standard maintenance expenses
- selling the company
- I sell the cabin
Circumstances must be assessed for each family and cabin property. The advantage you get from using a skilled farmhouse law attorney is knowing that you have created a flexible legal entity to fulfill your hopes and dreams of protecting, preserving and saving your family farmhouse for the use of all future generations.
A well-designed cabin ownership plan preserves the “experience” of the family cabin. All the memories the experience produces are worth more than money and can give you what you hoped for: a common, 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 farmhouse estate plan for your heirs.