It is easy to fall in love with Northern Michigan. Many families have vacationed here for generations and sometimes purchase a second home, or “family cottage.” Over the years, these special places create generations of memories.
As the property grows in sentimental value, it may, over the years, also grow in actual value. Our hometown is a regional, if not national, vacation destination. Moreover, the local real estate market has been fairly positive over the decades. In other words, your family’s cottage may be worth a lot of money. Just like any investment, proper planning is required to avoid conflict and a seamless transfer of ownership to the next generation.
At first glance, passing ownership of the cottage appears simple. However, if you have multiple children, or if you share ownership of the cottage with your siblings, succession of ownership is ripe for conflict.
For example: the parents of three children both pass, and their Trust grants each child one-third of either the cottage itself or proceeds from a sale. The first child loves the cottage, visiting each summer with his wife and children. He is also financially stable and able to pay to maintain the cottage. The second son, single and financially irresponsible, has little use for the cottage. He would rather have some desperately needed cash. The daughter sees the cottage as a long-term investment and wants to sell the property in a few years’ time.
The stage is set for a lawsuit. Even if the three decide to keep the place right now as it is, issues can still arise in the future. What happens if second son fails to pay his share of the summer tax bill? What if the daughter wants to sell three years later, when she believes the market is at its peak? What if someone wants to improve the property, or perform regular (but sometimes expensive) maintenance and the others cannot afford their share?
Complicating matters more is that these three adult (not married to each other) owners in the example also have a right to partition. What this means under Michigan law is that a single owner can force a sale of the property (and divide the proceeds) or break up the land into individual pieces … sometimes this is ok if it is strictly vacant land that can be easily divided into separate parcels, but if there is a structure, like a house or cottage, this is not practical and a court is highly unlikely to take this approach.
What is scary is that there is no defense to partition action. This means it only takes one person to throw the whole thing out, even if the majority wishes to keep the property intact and in the family.
The solution to the problems set forth above (and many more) is the use of a limited liability company (“LLC”) to protect the integrity of the shared ownership and family ownership of the property.
Broadly speaking, this involves a transfer of all individual ownership into a newly created single LLC. Why does this help? Here are just a few examples:
- Each person that transfers their ownership of the property into the LLC will receive a membership interest in the newly formed company—similar to stock in a corporation. Where each sibling previously owned real property, they now own a membership interest in the LLC, which is personal property. This creates numerous advantages, most importantly that a partition action is no longer available.
- If one of the owners gets into debt, without an LLC, the creditor could also force a sale. However, once transferred into an LLC, a creditor can only place a lien on the ownership interest itself, but not force a sale of the property itself.
- An LLC is governed under an Operating Agreement, which can spell out:
- Rules about usage, maintenance, improvements, income, etc.
- How to manage delinquent members, such as a member’s inability to pay his tax bill responsibility.
- How a member can be bought out, or even kicked out.
- It can also dictate who can obtain a membership interest through sale, inheritance, or even divorce, so you don’t have someone outside of the family owning a share of the family property.
This is only a small sampling of what a cottage LLC can do for your family. Call us at Schmeltzer Law to discuss what we can do to make sure the family cottage stays in the family.
This blog post was written by Benjamin W. Bryant, J.D., at Schmeltzer Law, and is not intended as legal advice nor does it create an attorney-client relationship. If you have questions or concerns specific to you, you are encouraged to seek qualified legal counsel.
Benjamin W. Bryant
Schmeltzer Law PLLC