LLCs for Estate Planning and Keeping the Family Cabin in the Family
December 8, 2016 | Michael Smith
It might come as a surprise to non-Hoosiers that several parts of Indiana are popular locations for vacation cabins. The best known are probably Brown County and the area around the Indiana Dunes. Other locales include Lake Maxinkuckee, Lake Monroe, and Lake Patoka; the Amish country and the smaller lakes of northern Indiana; the wooded hills in other parts of southern Indiana; and the small towns on the northern bank of the Ohio River. Saving the Family Cottage: A Guide to Succession Planning for your Cottage, Cabin, or Vacation Home, by Stuart J. Hollander, David S. Fry, and Rose Hollander, 4th ed., 2013, is an excellent resource for owners of family vacation homes or other property to be preserved for shared use by future generations. However, the principles are not restricted to leisure property. For example, owners of family farms will also find useful advice for keeping the farm in the family for generation after generation.
One of the central concepts of Saving the Family Cottage is to avoid problems of real property owned jointly by several individuals — a situation that, of course, can arise when property is passed from one generation to the next. When property has multiple owners, disagreements between them can result in the property being partitioned. For some types of property, such as undeveloped land, the partitioning may mean that the property is divided into multiple parcels, like cutting a pie into pieces, with each owner receiving a piece of the whole. In other cases, such as a vacation cottage, a dispute may result in the property being sold and the proceeds divided among the owners.
The authors’ primary solution to that problem — one that we and many estate planning attorneys heartily endorse — is to create a limited liability company to be owned by the family members and to transfer ownership of the property to the LLC. One reason is that transferring ownership of LLC interest from one person to another, unlike transferring ownership of real property, is generally not a matter of public record. A more compelling reason is that the law provides very few rules to govern the relationship between multiple owners of real property (or most personal property, for that matter) and very few mechanisms for resolving disputes that do not result in the termination of the joint ownership. In contrast, the flexibility of LLCs (which we have touted in this blog multiple times) permits the owners to decide in advance who will make decisions concerning the property and how they will be made and how disputes among heirs will be resolved while keeping the property in the family.
However, simply filing articles of organization with the Indiana Secretary of State and recording a deed transferring ownership of the property to the LLC is not enough. The LLC operating agreement is the key, and a form downloaded from the internet will almost certainly be woefully inadequate. The family members setting up the LLC must ponder and answer some difficult questions. They must anticipate future problems that are almost unimaginable today and decide how they will be solved. That’s where Saving the Family Cottage comes in. It presents the issues to consider, beginning with the fundamental question, Why do we want this property to stay the family after we’re gone? The authors suggest four categories of reasons:
- Emotional attachment. The fondness that family members feel toward the property exceeds the property’s economic value.
- Wealth accumulation. The property is a good investment.
- Family unity. The property is a focal point for family get togethers, and keeping it in the family will make it more likely that future generations stay connected.
- Family heritage. The property represents traditions that the owners want their descendants to understand and to carry on.
Different reasons for keeping the property in the family will lead to different decisions about the details of the LLCs operating agreement.
The authors also point to obstacles to keeping the property in the family that may arise and provide advice for dealing with them. They include:
- Ownership passing to the spouse or ex-spouse of a child or grandchild, either as a result of death or divorce, rather than to the original owners’ lineal descendants.
- The inability or unwillingness of a future heir to meet financial obligations with respect to the property.
- The bankruptcy of an heir.
- The desire of an heir to cash out, either to liquidate an asset or simply from lack of interest.
- Disagreement over operation or maintenance of the property or improvements to the property.
- The collective financial inability of heirs to keep the property.
The advice of an estate planning attorney experienced in drafting LLC operating agreements is, in our admittedly biased opinion, indispensable in ensuring that the wishes of the owner are carried out. Even so, your lawyer cannot make all the decisions for you. As with any aspect of an estate plan, the decisions are difficult and intensely personal, and making them can be hard work. Saving the Family Cottage is a good place to start.