Family cabins, whether lakeside, hunting, or recreational, abound throughout Minnesota. The most common way ownership of the family cabin is transferred to the next generation is by the provisions of a decedent’s will or by a simple deed transfer. In either event, the next generation holds ownership together, typically in a tenants-in-common relationship, but no formal agreement is in place to manage the variety of issues that will inevitably arise. For example, while the prospect of owning the family cabin may be a dream come true to some, others may be far less enthusiastic about the work and expense associated with owning and maintaining the property. They may live too far away to be able to make frequent visits, simply have no interest in cabin-centered vacations, or would prefer to sell the cabin instead.
Even if all the beneficiaries desire to keep the cabin, its use and maintenance may pose issues. Who gets to use the cabin, when, and how often? Who pays for, or performs, the necessary repairs? Should those more engaged users be somehow compensated, or receive preferential treatment, for the amount of labor and expense they’ve contributed? What happens if a beneficiary gets divorced, dies, or has creditor issues? And let’s not forget about the potential liabilities that accompany ownership in any property, including personal injuries, damage to property, etc.
Still, keeping the cabin in the family need not turn from a dream to a nightmare. Consider two popular approaches to settling the issues associated with cabin succession – creating a trust or setting up a limited liability company. With either one, the beneficiaries will not own the cabin directly (which is a significant advantage), and a framework will be in place to protect your legacy.
A Revocable or Irrevocable Trust
Rather than deeding the cabin and splitting ownership among the beneficiaries, the cabin’s owner can set up a trust that will hold the title of the cabin. This can be done as part of the owner’s revocable trust plan, as a separate stand-alone revocable trust, or even as an irrevocable trust if the owner desires to make a gift of the cabin during his/her lifetime. In any event, the owner designates a trustee to make all the decisions concerning the cabin, according to the terms spelled out in the trust, thereby helping to avoid any disagreements.
When setting up a Cabin Trust, it is often advisable to provide funds for the ongoing needs of the cabin (maintenance, insurance, property taxes). The money will serve to prevent disputes that may arise if the beneficiaries are unable or unwilling to shoulder the financial burden of supporting the cabin and will help guarantee that all beneficiaries continue to be able to enjoy the family cabin even if some do not have the financial means to support it. If the Cabin Trust is not funded or is underfunded, it is important to provide specific terms in the trust regarding (i) how an annual budget will be established to cover taxes, insurance, maintenance and operating costs; (ii) how the annual budget will be allocated among the beneficiaries, and when and how they will be expected to come up with the money; and (iii) what happens if a beneficiary cannot come up with the money. Answers to these and other questions are family-specific and range from a suspension of the right to use the cabin to forfeiture or buyout of their beneficial interest.
A Limited Liability Company (LLC)
Instead of deeding the cabin to a trust, a cabin owner can establish a LLC, deed the cabin’s title to the LLC, and then distribute and/or gift membership/ownership interests in the LLC to their children (or others). Rather than have a trust agreement and a corresponding trustee that governs the cabin relationship, the LLC should be governed by a well thought-out operating agreement. The operating agreement provides the framework for how the LLC functions and spells out the voting rights of the members and how cabin-related decisions are made. Often voting rights are governed by majority rule or, in case of a very significant decision – like a sale of the cabin or a substantial investment in it – a number larger than a simple majority. The agreement should also provide for how annual expenses will be divided and paid for, how annual duties such as upkeep and maintenance will be divided, and what rights to use the cabin each LLC member is entitled to.
WHICH OPTION SHOULD YOU CHOOSE?
Both the Cabin Trust and the LLC can address the issues of cabin use, financial and labor contributions to maintenance and penalties for non-compliance with the previously agreed-upon ground rules, and restrictions on transferring ownership and corresponding buy-out provisions. But each one presents somewhat different advantages and/or potential drawbacks.
With respect to liability issues, the LLC tends to provide better protection than the trust. While the trust agreement may attempt to insulate the beneficiaries from cabin-related liabilities, such protection may be undermined if beneficiaries make personal financial contributions to the trust (which makes them more than mere beneficiaries). An exception involves creditor claims that are not directly related to the cabin but may still make it a target as a potential source of funds for repaying a beneficiary’s debt or other legal obligation. In Minnesota, if the trust is not funded by the beneficiaries and includes a “spendthrift” provision, it insulates the cabin from creditor claims.
The key feature of a revocable trust is that, though it can be amended while the grantors are alive, it becomes irrevocable upon their death or incapacity. This feature is both a benefit, because the irrevocable nature makes it hard for beneficiaries to alter your intent as set forth in the trust agreement, but also a drawback, because it is inflexible and difficult to change. With a trust, you also have to plan for the trust’s longevity by appointing successor trustees, and finding the right individual/entity to serve in this important role can be a challenge. After all, it is the trustee that has to carry out the terms of the trust agreement and call balls and strikes when issues arise.
A LLC offers more flexibility, since its operating agreement can be amended at any time by the number of votes required in the agreement. This flexibility, however, has its downsides: for example, if the LLC holds money intended for ongoing maintenance of the cabin, the beneficiaries may vote to do something else with the funds instead. In other words, the beneficiaries could vote to alter your intent once you are gone. A trust, once it becomes irrevocable, protects the status quo.
Of course, no trust or operating agreement can entirely prevent disputes between family members, but with a trust or operating agreement in place a court or mediator will be tasked with interpreting the specific rules established by the trust or the operating agreement, rather than trying to reconcile the competing claims made by the beneficiaries.
Ultimately, the choice between the Cabin Trust and a LLC will depend on the specific goals, circumstances and concerns of the owner contemplating cabin succession. If you would like to seek advice on the best way forward for your family, please feel free to reach out to me. I would be happy to help.