Cottage Planning Solutions
The primary strategy in developing any cottage succession plan is to move the “direct” ownership of a family cottage to an “indirect” form of ownership by a Limited Liability Company, Trust or sometimes using a combination of those entities in the overall plan.
Real estate law governs the rights and duties of “direct owners”. Typical real estate law as developed historically through case law and through the establishment of various statutes put into effect by legislative entities.Real estate laws can impose duties on direct owners that can often time surprise cottage owners. It’s those surprises that can put the family cottage at risk. Real estate laws of direct ownership do not promote keeping the cottage in the family for multiple generations, and the threat of partition(a forced sale) and turmoil always exist.
“Indirect ownership” forms of a family cottage involve ownership and governance by an entity like a Limited Liability Company, Trust or Partnership. A cottage succession plan relies on indirect ownership and addresses inherent cottage sharing problems and allows you to manage your cottage like a business. A flexible Operating Agreement to govern an LLC or a well drafted trust document can address all aspects of maintaining your cottage in the family. These aspects include management of the property, financial provisions, usage provisions and prescribed and specific terms explaining the circumstances under which a transfer of ownership is permitted.
When you transfer ownership of the family cottage into an entity, the governing documentation of that entity, not general real estate law, governs the relationship with respect to rights and duties between the owners.You are able to customize an arrangement specifically for the best interests of your family.You are in control. You get to decide how the family cottage will be operated, financed, and most importantly, you are in control of how the cottage will pass from one generation to another.
There are several key areas of cottage related concerns which should be addressed and resolved in a successful cottage succession plan. These include:
The possibility that ownership of a part of the cottage will pass into the hands of a non-family member as a consequence of death or divorce.
What to do if a family member is not able or not willing to meet any or all financial commitments to the cottage.
The financial impact on the cottage if a family owner files bankruptcy, or a portion of the cottages interest is levied by a creditor of a family member.
How to solve internal conflicts between family members about how the cottage is operated, maintained or improved.
A family member wants to “cash out” their interest oif the family cottage.
Disharmony and even possible litigation between sibl;ings when parents are no longer around to mediate a peaceful resolution.
What happens when a child, or children cannot afford to keep the cottage.
Establishing an entity to own the family cottage affords the opportunity to draft specific provisions to provide solutions to the aforementioned problems and more.