What is a Cottage Succession Plan?

Estate Planning: Cottage Succession Plans

According to Travel & Leisure, Michigan ranks as one of the top states to own a vacation home. While many families have undoubtedly made memories along the fresh-water shores and wooded trails, what happens when the next generation stands to inherit the vacation property? A cottage succession plan is an option for some families, but what is a cottage succession plan?

A cottage succession plan is an estate planning tool that offers the best chance to keep a cottage or other vacation property in a family and prevent squabbles that may arise without a plan.

What are the benefits of a cottage succession plan?

A cottage succession plan serves several beneficial purposes, including the following.

The plan:

• Establishes a framework for making decisions affecting the cottage;
• Serves as a tool to use to dictate the rules of the cottage;
• Prevents a joint owner from forcing the sale of the property through an action for partition (a lawsuit brought by one owner against the other owner to force the division or sale of the real estate);
• Protects owners from creditor claims;
• Provides a vehicle to set money aside for the cottage's future expenses;
• May help avoid or delay the uncapping of Michigan property taxes;
• Assigns control of the cottage between or among generations; and
• Prevents transfer of interest to someone from outside the family.

What are the options for setting up a cottage succession plan?

There are a few options for setting up a cottage succession plan, including the following:

A Limited Liability Company

A popular option for preserving family homes is by creating a Limited Liability Company (LLC). Individuals who transfer ownership of their vacation properties or cottages to LLCs are required to keep simple records. Expenses and any income from the LLC are passed on to the owners, simplifying tax matters. In addition, an LLC provides family ownership of the cottage in perpetuity, and it prevents creditors from forcing a sale of the property if one heir experiences financial hardship.

A disadvantage of an LLC is that it does not prevent uncapping of property taxes, meaning the property tax on the property will increase when the LLC passes on to the next generation.

A Cottage Trust

An individual who creates a revocable cottage trust can transfer ownership of the property to the trust during his or her lifetime or the trust will transfer the property automatically upon death. The trust will establish beneficiaries and future beneficiaries; provide for payment of expenses, taxes, repairs, and maintenance; address scheduling; and designate a trustee and successor trustee. One advantage of a trust over an LLC is that the trust prevents the uncapping of property taxes (however, a vacation property rental may not qualify for this exemption). The disadvantages of a cottage trust include not providing the same liability protections offered by the LLC, and the trust cannot be perpetual regarding ownership of the estate.

Help is available

The attorneys at O’Reilly Rancilio are available to answer your estate planning questions. To speak with an attorney, please call 586-726-1000 or visit our website.