Tips on holding title to family cabin

How to avoid disagreement over use, maintenance, selling

By Inman News Feed
Add Comment Add Comment | Comments: 0 | Posted Oct. 12, 2011

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How to avoid disagreement over use, maintenance, selling

Tom Kelly
Inman News™

We have been parents for 31 years and dragged children through three primary residences. All of the homes had terrific amenities: views, schools, nearby playgrounds and neighborhood pals.

The four kids are grown and gone now, but if you could find them (I am rarely able to do so) and ask where their fondest memories took place, all would balk at those homes and choose the lake cabin we have shared with another family.

Autumn sparks a new academic year and the unofficial close of the summer vacation calendar. Families all over the country have begun to winterize their cabins and condos, assigning maintenance chores and attempting to schedule 2012 getaway weeks.

But what happens when one family member continues to be no help at all, shows up to the family retreat without notice, and has little regard for cabin tools and toys?

Attorneys David Fry and Stuart Hollander wrote "Saving the Family Cottage" (Nolo Press) to help answer questions about a family's second home and encourage parents to establish a plan that spells out how things should run down the road. ("Cottage" is a term primarily used in the Midwest and Northeast; "cabin" is popular in other regions.

"The goal of 'cottage law,' or cottage succession planning, is to establish a legal arrangement that successfully keeps a cottage in the family over multiple generations," Fry said. "One of the best ways to do so is to create a limited liability company (LLC) because of the flexibility it offers."

According to Fry, the problems caused by shared ownership under real property law are addressed by transferring the title to the cottage to a legal entity, such as an LLC, corporation, limited partnership or an irrevocable trust.

The entity provides a legal framework in which the parents or "founders" can script how the cottage is to be used, shared and passed on to future generations.

According to Fry, the relationship of the members to one another and to the property is established in the LLC's operating agreement. It determines everything about the cabin: schedule, contribution to expenses, who can be a "permissible" owner, whether a surviving spouse can inherit or use the place, and whether the property can be changed, mortgaged or sold.

Once the LLC is organized, the owners of the cottage deed their interests to the LLC in exchange for membership units. These units, which function like shares in a corporation, can be given to children during the owner's lifetime or passed to children at the owner's death.

Cottage LLCs normally are "manager-managed." This means that the family designates one or more of its members to perform such functions as paying the bills, coordinating schedules, and hiring contractors to service and maintain the cottage as stated in an operating agreement. The manager may have as much, or little, authority as the members wish, as provided in the agreement.

Decisions beyond the authority of the manager are made by the members. Less significant decisions might be made by a simple majority of members, where the biggest decisions (mortgaging the cottage, permitting renters, adding on to the cottage) normally are made by a greater majority of members (2/3 or 3/4).

"The art of cottage planning is in developing an agreement that addresses the needs and wishes of your family," Fry said. "The biggest mistake families make is not taking the time to spell things out."

Which brings us back to the question of the problem member. Without an agreement or formal entity, family members usually co-own the cabin as tenants in common or joint tenants, which are the most common forms of cottage ownership.

However, holding title as tenants in common can spark some problems: Each owner can force sale of the cottage through an action for partition (a court proceeding); there are no clear rules for sharing use or expense of the cottage; owners may transfer their interests in the cottage outside the family; and owners can mortgage their individual interests in the cottage, with a default causing problems for all.

"Some of these problems can be solved by using a joint owner's agreement," Fry said. "But the current owners rarely sit down and negotiate an arrangement."

Fry suggests that if the parents still own the property and the children share use of the property, the parents could establish an ownership arrangement that could keep a sibling from a veto and would allow a form of majority rule.

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