Many business owners form several types of business entities to hold their assets and operate different aspects of their businesses. A common strategy is to form limited liability companies to hold real estate. The operating entity, such as a manufacturing entity, pays monthly rent to the real estate LLC and this can work to keep liability of the operating entity separate from the real estate LLC. Some LLCs are formed to hold other assets, such as personal property that is leased to the operating entity. Also, LLCs are commonly used to manage family-owned assets and facilitate transfers among family members. LLCs are not required to have the formalities of meetings, minutes, and notices which are required for corporations. However, for an LLC to maintain its liability protections and protect itself from IRS attacks, it is prudent to exercise some formalities to evidence that the LLC is maintained as a separate entity and is not the alter ego of its owner(s). We advise many of our Cottage Law clients and business owners and families who use LLCs to hold and manage assets that they should treat the LLC as a business by following the pointers below.

• form the entity in strict compliance with the law of the state where it is formed
• apply for and obtain a federal ID number
• fund the LLC with assets immediately upon formation or soon after forming the entity
• the assets transferred to the LLC should be titled in the name of the LLC and ensure that insurance policies reflect the proper ownership
• the LLC should have its own bank accounts that are not used as the members’ (the owners’) personal cash registers
• all LLC related funds should go in and out of LLC accounts; any distributions to the members should be from the funds held in the LLC’s accounts
• the LLC’s assets should not be for the personal use of the members unless the members compensate the LLC for the use of the assets
• personal assets should not be transferred to the LLC unless those assets are for a business purpose and no longer to be used personally
• if the LLC has a manager, the manager should respect the fiduciary duty he or she has to the owners in conducting the affairs of the LLC
• if a member dies, the LLC should continue to operate as usual, as opposed to dissolving, because the IRS could argue the LLC was solely formed for the avoidance of taxes and not legitimate business purposes
• the Operating Agreement should provide a roadmap as to how distributions are to be made and no deviation from this should occur
• the LLCs books and records, corporate and financial, should be attended to on a timely basis and with professional care
• the Operating Agreement should provide for how voting rights are allocated, and while different voting requirements can be established to suit the needs and concerns of the members, the voting requirements should be respected at all times
• the members of the LLC should receive K-1s to attach to their income tax returns
• the members should hold annual meetings and keep minutes of those meetings, filing them in the record book
• the members should hold special meetings for important decisions or provide signed consent resolutions, filing those documents in the record book

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It doesn’t matter what time of day you arrive, everything always looks the same. Granted, the trees are taller and wildflowers seem to be growing everywhere. But your family cottage is the same to you today as it’s always been.

Cubby holes filled with trinkets and treasures
While waving hello to neighboring friends you realize every family cottage and summer home is as different as the memories gathered by families every summer. Each cottage has a special cubby hole filled with trinkets and treasures from sandy beaches and hiking adventures through surrounding woods. Weathered hinges guarantee screen doors will squeak open and slam shut right on cue announcing that this is summer. It’s easy to get caught up in the moment of racing down to the lake and assuming every summer will be just like the last.

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Succession Planning for Vacation Property
Steps for Cottage Sharing
With summer here, many families will be enjoying their family cottages during the span of summer’s endless sunshine defining the lazy days of summer at the family cottage.

This is how summers have always been. You enjoy the laughter of denials and finger-pointing about who created the latest mysterious heap of sandy wet towels on the cottage porch floor. The children stand shivering from their latest dip in the lake and you silently wager bets against how long it will take for the lake water drops hanging from ends of clumped wet bangs to land on the table.

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Most people would think “economic value” is the most important factor to protect the family cottage. Common “emotional value” has proven time and time again as the most important motivation behind developing a cottage succession plan to protect the family cottage.

Yes, it’s true when they say, “beauty is in the eye of the beholder,” and it’s especially true when thinking of the family cottage. Whether the family cottage is a family retreat in some stunning mountain region, or a luxurious custom built retirement home on one of the Great Lakes touching Michigan, Illinois, Wisconsin, New York, Ohio, Indiana or even Canada, or a small rustic cabin on a pristine lake or stream, it’s not “economic value” that is the most important factor to protect the family cottage, it’s the “emotional value.”

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They say, “beauty is in the eye of the beholder.” That’s especially true when applied to the family cottage. Whether the family cottage is a small rustic cabin on a pristine lake or stream, a luxurious retirement home on one of the Great Lakes or ocean shore, or a family retreat in some stunning mountain region, it’s not “economic value” that is the most important factor in keeping the family cottage, it’s the “emotional value.”

Some would argue that a place is just a place but the people make it special. When it comes to the family cottage, it can be argued “the place” is special, sometimes almost magical, and can transform those who spend time in that place from stressed out, overworked adults back to their carefree days as a child; skipping rocks on the water, swimming off the dock, nursing a sunburn and eating s’mores by the campfire. For most, the family cottage creates a place for memories and traditions to be formed and a safe haven to retreat to for rest, reflection and reminiscing later in life. The family cottage is a constant in an ever-changing world. It’s where experiences can be shared and passed on to the next generation in their purest form.

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While the changes are mainly technical in nature, some are substantive and worth noting. Changes to the Michigan Limited Liability Company Act (“LLCA”) took effect on December 16, 2010.

The LLCA now: Read the rest of this entry »

A cottage in northern Michigan is a way of life. It is a place with a purpose. It awakens the heart. There is passion and dreams at a cottage. There are water bays, beaches, bonfires, friends, family, pets, and vineyards with great wineries. A cottage is a feeling of peace. This becomes a beautiful place to be, especially when you don’t want to be anywhere else.

Cottage-law stands for:

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Why should your cottage be in jeopardy and need saving? Cottage-Law.com expert Dan A. Penning has invaluable strategies to pro-actively plan how to protect your cottage first and secure its future. Why risk an emergency rescue plan when you can plan to avoid the crisis with a cottage succession plan?

The Right Legal Entity for Your Cottage

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.

How We Hold Title to Real Estate Ownership

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.

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