Cottage Succession Planning Terms
The objective is to insert planning provisions to govern the management of the cottage, how the financial obligations of the cottage will be met, how the cottage will be used and hope ownership may be transferred among next generation owners in order to provide independent governance for the cottage.
Management
The family will need to choose between centralized management like the decision making being vested within one individual's discretion or a more diverse management structure consisting of more than one decision maker where votes are taken to approve various decisions and issues.
The key with management provisions is that a system of decision making and authority be implemented to allow for the cottage to be managed in future generations of ownership. In LLC’s you appoint a manager or a number of managers to make decisions from simple day to day operation of the cottage up to important decisions on maintenance, repairs and using the cottage as possible collateral for a mortgage.
A plan as to how and who will make those decisions is important. Further, a plan usually recognizes that there are certain decisions that should be required to a vote of all co-owners or beneficiaries such as the following examples:
Annual budget
Capital improvements
Operating agreement amendments
Amendments to the Articles of Organization of the Company Merging the company
Dissolving the company Establishing a cottage use fee for members
Select or replace company managers
Mortgaging the cottage Renting the cottage
Changing the company to a different legal form
Endowment contribution
Amend the operating agreement Approve construction or remodeling which alters the character of the cottage Increasing members portion of property insurance, property taxes, and standard maintenance expenses
Selling the company
Selling the cottage
Financial Considerations
How will the cottage expenses get paid?
Some plans include additional liquid funds of cash or investment to fund the payment of future expenses and how the managers of the entity holding legal title to the cottage should manage those assets including provisions on how those funds should be used to pay expenses.
Aside from funds being provided in the plan, provisions are usually included whereby the expenses are to be shared among the co-owners in an LLC or beneficiaries in a Cottage Trust.
Provisions are included on how budgets to pay expenses are formulated, how the expenses are to be paid, how and when proceeds are to be contributed by the LLC owners or beneficiaries. Also, what happens and what penalties are applied if someone doesn’t contribute toward payment of expenses.
Usage-Scheduling Time to Enjoy the Family Cottage!
Scheduling and Use is an important part of the Cottage Succession Planning. Without a clearly defined schedule of use and cottage sharing guidelines for family members you are keeping the door wide open for family conflict and ugly power struggles between siblings and cousins over prime-season cottage use and off-season cottage use.
When you are creating the scheduling for sharing the cottage think it through. What are your family traditions, and what are the overall needs of your family?
You also need to determine two other things. How is time divided, and who may use the cottage. You have to take into consideration the reality of having to make decisions about parents, young (and inclined to party) relatives, renters, guests, pets, and the surviving spouse of a sibling.
Consideration of the following guidelines is helpful when considering the usage provisions in cottage plans:
KEEP IT SIMPLE!
Use ownership share "units" of the cottage in proportion to use
Make it mathematically fair Find a way to respect family traditions, main holiday family gatherings, and how your family likes to gather (or not)
If family wants rental income schedule it in
Incorporate a way for members to exchange their time slots if they desire
Create and post a clear schedule
Transfer of Ownership
Without specific provisions about how a future owner/beneficiary may transfer and/or sell his/her interest, such a lack of planning can lead to legal actions for partition and sale of the property.
The most basic terms governing the transfer of ownership are including certain “buy-sell” provisions. The terms set forth who, when, for how much and how often a sale or transfer of ownership interests can be done. Also, terms are usually including restricting eligibility requirements for ownership to the direct descendants of the original cottage owners to avoid cottage ownership from drifting outside the family.
Provisions are also typically included to protect against an owner or beneficiary from involuntarily losing his/her interest through a divorce or a judgment creditor.
Contact us.
dan@penninggroup.com
(248) 752-6480
P.O Box 490
Suttons Bay, MI 49682