Cottage Legacy Planning Attorney Serving Livonia, Plymouth, and Northville

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We are fortunate to live in a state with over 60,000 lakes, miles of streams and rivers, and tens of thousands of acres of woodlands. Michigan is a beautiful state and it is no surprise that many residents own a primary residence and a family cottage to enjoy the beauty, and to get away from the stress that sometimes comes along with the fast pace in Southeast, MI.

Family cottages often act as the family meeting place when children get older and like a magnet helps to keep families together. Cottage planning helps to ensure that the very place that brought families together does not act as the thing that tears them apart after the parents have passed. Family cottages bring a wide range of emotions, as well as, how family money should be spent for upkeep etc., and without proper succession planning these two factors can quickly disintegrate into resentment and even lawsuits.

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Cottage Planning Consideration:

Getting Started: With everyone’s busy schedules, cottage succession planning is often something that parents believe can wait. Cottage owners may worry that small conflicts that exist today could be exacerbated as the discussions begin. Further, there is also a feeling that maybe we should just let the family members figure it out after we pass. Lastly, cottage owners simply don’t want the expense or perceived headache of putting together a cottage plan.

While all the above are understandable emotions, it is important that cottage owners don’t wait as keeping family unity and ensuring that your wishes for the property are honored should be completed in a timely manner.

Asking Foundational Questions: There are generally two questions that a cottage owner should answer. First, do your children, or next generation, want the property, and Second if they do want the property can they afford the upkeep?

Property Tax Considerations: The Michigan Legislature has recently made updates to the General Property Tax Act (GPTA). These changes make transferring ownership of property to family members easier and less expensive. Utilizing an LLC for cottage planning used to be very popular, but now this is considered an uncapping event which could lead to additional taxes.

Common Ways to Pass Your Cottage to Your Family:

Tenant in Common or Joint Ownership Deed with Operation Agreement Cottage Plan:

This is a simplest planning process that ensures that your property passes to your next generation.

Pros:

A good divestment strategy for older adults.
When transferring property to children or other qualifying family member, there is no property tax uncapping which helps to keep the property taxes roughly where they are today.
Operating agreement will clearly spell out the role and responsibility of the family members taking ownership of the property and will help to maintain family harmony.
Operating agreement is simple to manage and does not have the same requirements needed when managing a trust or LLC.
Property will pass through the decedent’s estate plan, when tenant in common used, meaning that in most cases it will stay in the family.

Cons:

Does not provide liability protection. Maintaining insurance on the property or an umbrella policy would be recommended.
Questionable as to whether the operating agreement or a deed restriction could ensure that the next generation abides by the operating agreement which could mean the property could eventually no longer stay in the family.
While gifts are generally considered separate marital property, there are instances where the ex-spouse could get the interest in the property.

Limited Liability Company (LLC) Based Cottage Property Succession Plan:

An LLC, in most instances, the most versatile and useful planning tool for cottage succession planning. It provides many of the things that cottage owners desire when transferring property and is a relatively simple way to manage the day to day operations of cottage ownership.

Pros:

Flexible agreement that is typically easy to setup and manage. Creating of an operating agreement which spells out how the property should be managed.
Provides liability protection to the owners of the property.
Allows the property to stay in the family for multiple generations, and less concern if one of the children gets a divorce.

Cons:

Would be an uncapping of property tax event when the property was transferred to the LLC. This could lead to an increase in property tax.

LLC and Trust Based Hybrid Recreational Property Plan:

While the LLC is probably best suited to create an effective, flexible, and durable succession plan for the family cottage, transfers to an LLC or transfers of LLC membership interests can result in an uncapping. The property tax uncapping can be overcome with a hybrid approach that utilizes both an LLC and a Trust.

Pros:

Provides liability protection to the owners of the property.
Allows the property to stay in the family for multiple generations, and no concern if one of the children gets a divorce.
Since the property is transferring to your children it will not be subject to property tax uncapping which will keep the property taxes roughly where they are today.

Cons:

Most paperwork to manage and a bit of a burden on the trustees and members of the LLC as compared to the previous two options.

Proudly Serving Livonia and Surrounding Areas

While cottage planning may not be the best part of owning a cottage in Michigan, it is quite important and recommended for most. It is a great way to make sure the family cottage stays in the family and just as important helps to ensure family harmony.

Matt Devitt Law, PLC provides a full suite estate planning and real estate legal services. Having experience in estate planning and complex real estate transactions allows us to put together great cottage planning solutions that fit together with your estate plan and honor your wishes.

We work with our surrounding community nearby Livonia, Northville, Plymouth, Novi, Farmington Hills, and beyond. Our focus is on providing pragmatic value based solutions for your estate planning, small business, and real-estate legal needs. Give Matt a call (734) 335-0713 for a free consult.