First Steps Cottage Succession Planning

First, ask your child, or children, if they want a share of the cottage. They may not want a share of the family cottage and there could be a variety of reasons. Each should be explored for passing on to them an alternative value of their share of the family cottage.

The best way to protect your family cottage is to move it away from the hazards of “direct ownership” being governed by real estate laws. We recommend moving the family cottage from direct ownership to “indirect ownership” and for a Limited Liability Company which is governed by Entity Laws rather than Real Estate Laws.

When you form a Limited Liability Company (LLC) for your family cottage you create a company which has owners, and they are often referred to as “members of the company”.

The “Operating Agreement is the core strength of a successful Cottage Succession Plan. It is designed to control the use and enjoyment for all of the family cottage. The Operating Agreement provides a structure of rules to manage the operation and future of the cottage and includes the rights and obligations for each “member of your cottage LLC”. There are similarities with each operating agreement, but like the diversity of families, each plan is unique to that family’s requirements.

The Voting Power of Membership Units

It is natural when you think of a “company” to think in terms of owning a “share” in the company. Even though it’s not required, some families issue “Membership Certificates” to the new members of the Cottage LLC. Having a solid certificate in hand clarifies the identify of the owner and how many “units” in the company are held by that owner. An LLC is the perfect legal entity to incorporate the principles of democracy – each member gets a vote on everything so “Units” are important when members are voting on cottage operating and shared use concerns.

Because a cottage succession plan is designed for future generations, when determining the number of “units” or shares in the cottage LLC, it is best to choose many versus fewer to avoid having to create “fractional” units.

When Will Your Cottage Plan Become Effective? Now or Later?

Part of the initial cottage succession planning will be deciding which type of Limited Liability Company (LLC) to form. This involves timing – when do you want the LLC to become effective. Now or Later?

• An “Immediate LLC” takes effect “immediately” when you finalize your operating agreement, file articles of organization, and sign the deed.
• A “Springing LLC” takes effect when the cottage owner dies and is set up through an estate plan.

Where Will You Form Your LLC?

You can establish and organize your LLC within any state, but most set the company up within the state where they have their permanent residence or within the state where the cottage is located.

Each state has similar Limited Liability Company Laws, but they are not identical. In some states LLC managers have complete control, whereas in other states more power is granted to members of the LLC.

Name Your Cottage Limited Liability Company

The name you choose for your LLC has to be unique. States will not accept nor register two LLCs with the same name. If you have decided on a name for your family cottage, and are establishing an “Immediate Cottage LLC” have your cottage law attorney reserve that name with the state where you are organizing your company. This will prevent another person from registering the name you have chosen for your LLC while you are finalizing your operating agreement.

Unfortunately you are not able to reserve a company name for a “Springing Cottage LLC” due to the time span between the drafting of an operating agreement and the owner’s death.