The Cottage Act is specific to the unique requirements of family cottages, vacation properties, hunting lodges, or other types of shared ownership. Cottage Law is a relatively new area of law practice. It gained momentum in the early 1990s when states created public policy laws that provide the essential legal framework for changing the ownership relationship of cottage owners. Michigan lawmakers created the Michigan Limited Liability Company Act (LLC) in 1993, and most states have since adopted similar limited liability company statutes. Cottage law is an area of law firm practice that focuses on family cottage sharing and cottage succession planning.
Succession planning for cabins involves the development of a succession plan to hand over the family cottage to children and future generations for their shared use and enjoyment. A succession plan is designed to protect the owner, family members and chalet property from threats of continued forced sharing of the chalet and to establish a level playing field for future operation, shared use, financing and the management of the family chalet.
7 key chalet concerns addressed by a chalet succession plan:
- The possibility that the ownership of part of the chalet will pass into the hands of a non-family member following death or divorce.
- What to do if a family member is unable or unwilling to meet all or part of their financial commitments to the chalet.
- The financial impact on the cottage if a family owner declares bankruptcy, or a portion of the cottage interest is taken by a creditor from a family member.
- How to resolve internal conflicts between family members over how the chalet is operated, maintained and improved.
- A family member wishes to “cash in” his participation in the family chalet.
- Disharmony and even possible litigation between siblings when the parents are no longer there to mediate a peaceful resolution.
- What happens when a child or children cannot afford to keep the chalet?
In the past, most parents relied on their estate plan to leave the family cottage equally to their children. While this is a way of passing ownership of the family cottage and transferring ownership to others, it presents financial, legal and emotional risks to both the heirs and the family cottage. An estate plan can’t prevent a partition lawsuit, set rules for the future of the property, or make your dreams of keeping the cottage in the family come true. In Michigan, every time you transfer title to a property, you risk “unblocking” the assessed value of the property and there is a good chance that you will experience a dramatic increase in property taxes on your cottage.
There are many reasons why sharing and passing on family cabins is difficult – but it doesn’t have to be difficult for you. Correct information and a “one-of-a-kind” cottage succession plan can eliminate the risks and troubles most families experience. Now is the time to start seeing your family cottage ownership from a different perspective.
How you own real estate
There are two ways to hold title to real estate:
Real estate law governs the rights and duties of “direct owners”. The granting of these rights and the way real estate laws impose obligations on direct owners often surprise cottage owners. It is the surprises of real estate law that put the family chalet at risk. Direct ownership land laws do not favor keeping the cottage in the family for several generations, and the threat of partition and unrest among the co-owners still exists.
The Entities Act, which are the laws on trusts, partnerships, corporations and limited liability companies, governs the rights and duties of “indirect owners”. Entity law is extremely flexible and adapts to the complex realities of commerce.
One of the first things you need to know is how you hold title to your chalet. Check the first paragraph of the act. If it says “Tenants in common”, you and the other co-owners are “direct owners” and your chalet is still at risk. Any co-owner could force the sale of the family cottage by using their right to bring a “right to share” legal action.
Typically, family chalets are governed by 600-year-old real estate laws. The American legal system is based on English common law and the principle underlying the “right to partition” is that no person can be required to own property. Think about it for a minute. If you plan to hand over the family cottage to your children on an equal basis as “tenants in common” and one of your children prefers to have the “cash value” of their inheritance and instead of a share of the family cottage , they can choose to end their relationship with their chalet co-owners. If the siblings cannot afford to ‘redeem’ a sibling and there is no way to evenly divide the cottage ownership, a court could order the property to be sold and distribute the proceeds. also between the co-owners. Your dream of spending happy family moments at the chalet for future generations is lost.
To protect the family cottage for future generations, change the ownership relationship from “direct owners” to “indirect owners” by creating a limited liability company (LLC). The LLC is governed by flexible entity laws which make arrangements for multiple owners and generations of family ownership, compared to real estate laws which promote the rights of the individual real estate owner.
Indirect ownership of your cottage through an LLC allows you to use laws intended for business entities. You can customize an arrangement specifically for your family’s wishes. You are in control. You decide how the family chalet will be operated, financed and, most importantly, you control how the chalet will pass from one generation to the next.
When you create a chalet limited liability company, you transfer title to the chalet to your chalet limited liability company. The LLC becomes the new owner of the chalet’s real estate, furniture, boats, vehicles and other equipment. You, and future generations of your family, become “indirect owners” of the chalet. Instead of a “direct ownership” interest in chalet real estate, you own “member units” in the cottage LLC and are then able to transfer “member interests” into the new limited liability company. from the cottage to your heirs.
Work with a cottage lawyer to examine your homestead as a whole. A cottage lawyer can advise you on short and long term strategies and legal structures to avoid “unblocking” your property, property tax appeals and related tax matters.
A cottage lawyer works with the family to develop a cottage management plan, to discuss cottage use planning, how to fairly resolve sibling power struggles for use during peak season months , how to finance and possibly endow the chalet and develop a financial plan for a “gracious outing” to welcome a sibling who does not want to share the use, care and expenses of the family chalet.
At the heart of the chalet and LLC succession plan is the chalet operating contract in which rules are set for the management, shared use and future of the chalet. Care should be taken to accommodate the wishes of each owner, as each owner should be prepared to sign the operating contract once it is drafted.
You will have to choose between two types of LLC depending on when you plan to implement the LLC. One is the “Immediate Cottage LLC” which comes into effect when cottage owners finalize their operating agreement, file articles of organization with their state, and sign a deed. The other is a “Springing Cottage LLC” which allows the owner of the cottage to maintain complete control over its lifetime and only takes effect when the owner of the cottage dies. The process for writing the chalet operating agreement is different for each type of LLC, but the objectives of the agreement are the same. Your chalet lawyer will advise you on the procedures applicable to both types of LLCs.
The Chalet Operating Agreement determines everything relating to the Chalet, including, but not limited to:
- Contributions to expenses
- Who can own
- Planned use
- Annual budget
- Capital improvements
- Amendments to operating agreements
- Amendments to the company’s articles of association
- Company merger
- Dissolve the business
- Establish chalet usage fees for members
- Select or replace business leaders
- Mortgage the chalet
- Rent the chalet
- Change the company to another legal form
- Endowment contribution
- Modify the operating contract
- Approve construction
- Approve the remodeling that changes the character of the chalet
- Increase in members’ share of home insurance, property taxes and standard maintenance fees
- Sell the business
- Sell the chalet
The circumstances must be assessed for each homestead and cottage. The benefit you gain from hiring a cottage lawyer lawyer is knowing that you have created a flexible legal entity to fulfill your hopes and dreams of protecting, preserving and safeguarding the family cottage for use by all future generations.
A well-designed chalet estate plan preserves the “experience” of the family chalet. All of the memories the experience produces are worth more than money and can provide what you hoped for – a common, loving bond and a closer grandchildren and great-grandchildren relationship.
Begin the process of creating your chalet plan. Having a simple plan in place, which you can easily modify and update, is better than the consequence of not having a protective cottage estate plan for your heirs.