Circumstances need to be evaluated for each family and cottage property. There are a few special cases where keeping your cottage under direct real estate ownership is the simple solution to a complex situation. Two cottage planning solutions which should be examined, and discussed with your cottage law attorney, are Life Estates and the Ownership Agreement.

Dan Penning examines each aspect of your estate and cottage property including strategies to employ to avoid uncapping cottage property taxes. The advantage you gain using a cottage law expert is knowing you will have created a flexible legal entity to fulfill your hopes and dreams of protecting, preserving and saving your family cottage for use by all future generations.

There are two ways to hold title to real estate:

• directly, or
• indirectly

Direct Ownership
Real Estate Law governs the rights and duties of “direct owners”. The granting of these rights and how real estate laws impose duties on direct owners often surprise cottage owners. It’s real estate law surprises which put the family cottage at risk. Real estate laws of direct ownership do not promote keeping the cottage in the family for multiple generations, and the threat of partition and turmoil always exist.

Indirect Ownership
Entity Law, which are Laws of Trusts, Partnerships, Corporations, and Limited Liability Companies, govern the rights and duties of “indirect owners”. Entity Law is extremely flexible and accommodates the complex realities of commerce.

A Cottage Succession Plan relies on indirect ownership and addresses inherent cottage sharing problems and allows you to manage your cottage like a business. A flexible Operating Agreement will determine everything about your cottage.

A Limited Liability Company (LLC) will change the way your family owns an interest in the family cottage. Instead of a “direct ownership” in the cottage property real estate, each family member becomes an “indirect owner” of membership units in your LLC.

The Penning Group recommends moving your cottage from direct ownership to indirect ownership. A Limited Liability Company-based Cottage Succession Plan provides maximum protection for:

• you
• your family
• the family cottage

A Cottage Limited Liability Company prevents any co-owner from forcing the sale of the family cottage by filing a partition law suit.

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.

What are some of your favorite family cottage memories?

When were those good times?

What did you do?

Who was there?

How hard did you laugh?

Your Cottage Property Could be At Risk
Each summer is a chance to create family memories of good times all over again. You’ve spent a lifetime of summers at the family cottage. Your family memories live there and it’s the only place where laughter replaces ringing phones, the sun is your only clock, and keeping sand out of your shoes and picnic basket is the challenge of the day.

It’s easy to go on thinking this is how you, your children, and grandchildren will always spend summers, at your family cottage by the lake.

Few know of the hazards of real estate laws and how they can wreak havoc on your future plans of a loving peace shared between your children and heirs at the family cottage. The reality of real estate laws and rhythms of life and death could alter your hopes and dreams of harmonious sharing of the family cottage by future generations.

Did you know that real estate law does not promote keeping the the family cottage in the family for multiple generations?

Your emotions and sentiments that are woven into the family cottage may not match how your children, and their spouses, view your family cottage. A child might not want any part of the cottage because they can’t afford it, they live in another state and aren’t able to use it, or they simply want want its cash value and plan to “cash out their inheritance”, or worse yet, your child might lose their share of the family cottage during a divorce. All are messy situations without equitable solutions for all your children without a plan.

If there are no specific, and enforceable, instructions about how the cottage co-ownership should be managed you potentially place your valuable family legacy asset in harm’s way.

There is a lot to consider when planning the family cottage’s future survival. Yes, you could draw up a simple will and leave the family cottage equally to your children, but real estate law surprises put the family cottage at risk.

The Right to Partition Could Force the Sale of Your Family Cottage

This is where things could potentially go very wrong.

The American legal system is based upon common law. Our real estate laws are based upon 600-year-old laws which have not changed much over the years.

Read Your Cottage Property Deed
What could happen next depends on the first paragraph of the deed for the family cottage property.

If you leave your cottage equally to your children in the standard way as “tenants in common”, which is the traditional form of real estate ownership, any “tenant in common” (your children become co-owners) could force the sale of the cottage. This is called The Right to Partition.

The principle behind The Right to Partition is based upon English common law that no person can be required to own property. If there is a legal conflict between your children, or the co-owners of the cottage property, a court will order the sale of the cottage property if it cannot be divided in a fair way – easy to do for land, but how do you equally divide a building or a boat or a wooden dock? You can’t. The cottage property will be sold and the proceeds from the sale will be equally divided between the co-owners.