Planning for the Family Cabin

Many Utah families have fond memories of spending time together at a "family cabin." Whether it's up at Sundance, Bear Lake, Heber, Park City, or any other number of beautiful locations throughout the country, a family cabin often is a repository for a wealth of happy memories. Because of these frequently strong sentimental attachments to vacation homes, those who own them often want to ensure that the cabin stays within the family and will continue to be used over generations to keep family members close to one another. However, harmonious use of such properties can often go quickly awry without proper "cottage planning."

What is "cottage planning?" First and foremost, it is recognizing that a family cabin is a much different asset than a typical asset passed on through a traditional trust-based estate plan. Once you recognize that, then cottage planning can focus on designing and implementing a plan for the successful transition of a cherished family vacation property to future generations. If done properly, you can greatly increase the chances that the family cabin will stay within the family and be used for its intended purpose - to maintain and strengthen family relationships.

Unfortunately, many family cabin owners never think about the numerous pitfalls that lurk in the shadows when it comes to passing on the family cabin.

Here are just a few things that can, and frequently do, go wrong when passing the family cabin on to future generations:

In a typical estate plan (will or trust based), the family cabin is passed to the children "in equal shares." In Utah, such language alone typically creates a "tenancy in common." U.C.A. Sec. 57-1-5(1)(b). The following items are the more distinctive, and problematic, features of this style of joint ownership:

1. Each tenant in common ("T/C") has a right of "partition." This essentially means that any one of the co-owners can force a sale of the property on a whim if they want the economic value of their share, and if the other co-owners don't have access to the cash to immediately buy-out the other co-owner.

2. Each T/C owns an "undivided interest." This has many potentially negative consequences. Just one example: if one co-owner decided to paint the house hot pink, the others would have no legal basis for challenging his doing so, but might well be on the hook for the costs of the paint if the court agreed that the house needed a new paint job for maintenance purposes.

3. A T/C has the right to transfer his interest to any person at any time. For instance, if your brother needed some quick cash, he could immediately sell his share of the cabin to the Beverly Hillbillies from down the street. Next thing you know, you'd be having to work out scheduling with some rather "interesting" people, to put it delicately.

4. A T/C does not owe rent to the other owners for using the cottage. Say your brother who is a co-owner with you gets kicked out of his house by his wife. He shacks up at the cabin for the next nine months. Although he is fine with other people using the cabin while he's there, it's a bit uncomfortable for you and your family. Too bad for you. He owes you nothing, no rent, no apologies.

5. A T/C may rent out the cottage to third parties without the consent of the other owners. Really? Yes.

6. A T/C is not required to compensate another tenant for services associated with management of the cottage. So if you end up maintaining everything, paying the property taxes, contracting for repairs, etc. your co-owner siblings don't have to compensate you for your time spent on these administrative tasks. This usually means that the most responsible one is stuck with the thankless job.

7. A T/C is not entitled to reimbursement for improvements or repairs unless the repairs are "necessary to preserve" the cabin. If the parties disagree on what is "necessary," guess who gets to decide? A judge.

8. A T/C who pays a disproportionate share of expenses is not necessarily entitled to reimbursement. Again, if disagreements arise as to how expenses should be shared, a judge may have to get involved to solve the dispute.

9. A T/C has only limited duties to the other owners. If one owner buys insurance for only his 1/3 share of the cabin and it burns down, he gets his insurance and the others are left out in the cold. He had no duty to preserve their interests in the cabin.

Realize that the above list only discusses the problems with owning a cabin as Tenants in Common. What if you own it as Joint Tenants? Well, that's another topic, for another day. But suffice it to say, that many of the above problems could occur, plus some nasty new ones as well.

So, is there a better way?

Absolutely. Excellent family cabin planning can, and often will, involve the use of a Limited Liability Company (LLC). Once a LLC is formed, the cabin and all the contents of the cabin can be transferred to it. Either at death, or during life, the ownership of the cabin can be transferred to family members through fractional ownership interests in the LLC, rather than as Tenants in Common on the property itself. Below are just a few reasons why the use of such an entity can be hugely beneficial in this situation:

1. An LLC operating agreement (OA) can be crafted to place restrictions on the ability of owners to transfer or sell their interest. For instance, your agreement may restrict each other from selling your interests to someone outside of the family, or from going to a non-blood relative in a divorce settlement.

2. The OA can be drafted to set the formula for how a member can sell his or her interest. In other words, how much will the other members have to pay upfront, over how long can they make payments and at what interest rate.

3. The OA can contain rules for use of the cabin, who it can use it, for how long, during which weeks, and whether or not it can be rented out and how the rent money is to be used/allocated.

4. The OA can spell out the amount of money that each member is required to contribute to the upkeep and maintenance on the cabin, when the amounts are due, and the penalties for failure to make timely and sufficient payments - for example, loss of use and eventual loss of membership interests in the cabin.

5. Additionally, an LLC OA
can be a very useful tool when a member of the LLC runs into legal trouble and is sued. If a creditor obtains a judgment against a member, an OA can prevent the creditor from being able to force a partition or sale of the property. The creditor may be entitled to a portion of any rental income generated by rental of the cabin, but language in the OA could prevent the creditor from using the cabin, renting it out, or even require that the creditor's interest be sold to the remaining members for a discounted price.

While the above items are just a few of the benefits of owning a vacation property through an LLC, they are nevertheless significant enough that the extra work to set it up and maintain it may be well worth the benefits that such a form of ownership can provide. Remember though, as with any form of property transfer, there are legal and tax consequences that you should be aware of. Before initiating this type of planning, you should speak with your legal and tax advisors to make sure you fully understand the implications of this type of planning.

RobRoy wishes to acknowledge Stuart J. Hollander, Rose Hollander, & David S. Fry, authors of "Saving the Family Cottage: A Guide to Succession Planning for Your Cottage, Cabin, Camp or Vacation Home" for much of the inspiration and content of this article.