One of the most critical issues in any cottage succession plan is “when,” “how” and “to whom” can common owners of the family cottage transfer their ownership interest. Absent specific planning rules to govern these issues, transfers of ownership and decisions of an owner to sell his/her ownership in the family cottage is usually the most significant threat to keeping the cottage in the family.
Restrictions Usually Require “Intra” Family Transfers
Most often, the primary concern is to prevent any ownership of the family cottage from being transferred either voluntarily or involuntarily to a non-family member. A “Voluntary” transfer simply means sales of ownership based on an individual family member deciding he/she no longer desires to be an owner of the family cottage. “Involuntary” transfers can occur as a result of court-ordered transfers resulting from bankruptcy or other claims against the owner in litigation, including divorce actions.
To address these circumstances, provisions can be drafted into an agreement governing common ownership whereby an owner’s interest in the family cottage can only be acquired by the owner’s descendants or other family members who are common descendants of, e.g., the owner’s parents. These restrictions are enforceable and can protect against any non-family third parties from becoming a common owner of the family cottage.
How Can I Sell My Ownership Interest?
In order to manage the process of a common owner who decides to sell his/her ownership interest, provisions can be incorporated into an agreement that require the exiting owner to sell or gift (i.e., to offer) the ownership to his/her immediate family first, and thereafter to other common owners.
An orderly process can be adopted to govern this situation, including a notice provision, prescribed time periods to respond to notices of a desire to transfer an ownership interest, and a catch-all or ultimate purchase provision requiring, e.g., the company or entity to buy the exiting owner’s interest if the individual family members decline to purchase or assume the exiting owner’s ownership share.
These provisions also include rules to define how the exiting owner’s ownership interest will be valued and how the purchase price will be paid to the exiting owner. Perhaps the provisions of the agreement require the exiting owner to accept payments over a period of time from the purchasing owner or company so as to not “break the bank” of those desiring to continue to own the cottage, which could result from an exiting owner demanding all of his/her money up front. These payment solutions can avoid all of the owners having to end up selling their common ownership in the family cottage based on financial constraint that would otherwise not allow them to pay full price immediately to an exiting owner.
If these types of provisions are not spelled out in an agreement, oftentimes an exiting owner could force a “legal partition” of the property by filing a lawsuit requesting that a judge order the family cottage to be sold. Careful planning regarding the process of how an ownership interest can be transferred will prevent any negative consequences whereby the family ultimately sold based on individuals who no longer desire to be owners.
When Can I Sell My Ownership Interest?
The terms of an agreement can also provide the timing as far as when an ownership interest can be transferred. Most often agreements provide that only a certain number of exiting owners can be bought out at one time. This type of provision can avoid multiple common owners from trying to exit ownership of a property, which cumulatively can place too much of a burden on those owners who desire to keep ownership of the family cottage. In addition, some families make provisions in agreements whereby there is a waiting period to exit as a common owner of a family cottage for a period of time after, e.g., receiving the cottage from a parent’s estate.
Timing issues as well as the financial realities of those trying to purchase an exiting owner’s ownership interest in the family cottage can also be problematic and should be addressed in any agreement to prevent unintended consequences, whereby all the common owners of the family cottage are forced to sell because of a lack of planning regarding the timing of when common owners may exit ownership in the family cottage.
As with the other factors that we recently have examined regarding provisions that are helpful to govern common ownership situations of a family cottage, including payment of expenses, management and usage rules, and transfers of ownership, it is critical to provide structure and rules to manage potential transfer of ownership situations in order to protect continued family ownership in the family cottage.