Estate Planning for the Family Vacation Home

  

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By: John O'Brien
CT Trust Counsel, LLC
www.estateplanningct.com
Member of WealthCounsel

As I sit writing this, we are in the midst of a major snowstorm, and my topic selection is both a wish for New England’s warmer weather and an anticipation of those upcoming summer days. The family cottage is an integral part of those wonderful summer days, a much treasured family asset and yet an often under-planned one. The founding generation has a strong desire for the cottage to remain in the family for the harmonious use of generations to come. Yet, harmonious use can be both fleeting and problematic without good effective cottage planning.

Proper cottage planning changes the manner by which legal interest in the cottage is held by the owners. They do not have a direct ownership interest, but rather own a membership interest/unit in a limited liability company. The limited liability company owns the cottage, its furnishings and other accompanying accoutrements. The LLC’s Operating Agreement governs and controls the rights, responsibilities and obligations of the various members. It is a well-drafted Operating Agreement that provides the structure to foster the harmonious use so oftentimes elusive with traditional planning.

What are some of the shortcomings with the traditional planning model? At its simplest explanation, we all understand the traditional planning model to be the stated intention “we leave our cottage to our children, John, Diana, Kevin, Michelle in equal shares.” With this bequest, the children each own a share as a joint tenant.

With this model, what if

1. One of the children divorces. Well, then it is possible that as part of the divorce, the child’s spouse could end up with his/her ownership interest or the judge could order the interest sold; 
2. One of the children passes away and his/her spouse inherits the interest and remarries. It is possible that the surviving spouse’s new partner could end up with the interest or for that matter, the new partner’s children from a previous marriage; 
3. One or more of the children fall on difficult financial times and cannot help contribute to the upkeep of the cottage and the others bring suit to rectify the situation. This is not engendering family harmony;
4. One of the children’s creditors attaches the interest. Well, then the creditor can force a sale of the cottage to have the debt paid; 
5. One of the children no longer wants to have anything to do with the cottage and insists on getting out. Well then, he/she could bring a partition action looking to force a sale of the cottage; or
6. One of the children dies without marrying and without having children, but leaves his share to a friend. Well now the family is sharing the cottage with complete strangers.

One quickly begins to get a sense that this traditional model is fraught with the potential for all kinds of discord.

The cottage planning model eliminates the potential for discord through the language of a well-drafted Operating Agreement. For example…

1. The Operating Agreement can have transfer restrictions and specifically indicate to whom a transfer of interest can be automatically made, to whom a transfer may be made upon the vote of other members and to whom transfers cannot be made at all; 
2. The Operating Agreement can specifically set forth the amount each member is to provide for upkeep every year and set forth particular consequences if not paid, i.e., loss of use and eventually relinquishment of membership interest; 
3. A creditor of any member would only get a charging order against that member's interest and could not require a sale of the interest. The creditor could also, as a result, become responsible for the member's share of the upkeep and thus, lose the charging order against the interest if not paid. Moreover, there could be language that permits the other members to compel a sale of that member's charged interest to the other members at a reduced value;
4. The Operating Agreement would specifically set forth how a member would be dealt with it they wanted to sell their interest. The sale could be prohibited to include only the other members and based upon a particular set reduced formula valuation and with a payout over time; and 
5. The Operating Agreement should also deal with such logistical issues as use and occupancy among members, specific time carved out for rental to nonmembers, etc.

It becomes clear that with well-drafted language in an Operating Agreement making everything specific, harmony can be achieved and maintained for generations to come. So please bring on summer.

Please share your thoughts about this topic in the comment section below.