In past articles for this column, we have talked about how to ‘keep the lake cabin in the family’. For this article I will compare the use of a cabin trust vs. a cabin LLC. It’s important to note that this article addresses only a single component of an estate plan. A cabin trust or cabin LLC is something that should be integrated into your overall estate plan, and it’s still very important to put a full estate plan in place.
There are many options for transferring ownership of the family lake property (or farm or recreational property) to members of the ‘next generation’. The ownership of the real property may be gifted outright to family members in its entirety or ownership may be gifted it part thereby establishing some type of joint ownership such as joint tenancy, tenancy – in – common, or the establishment of a life estate. A transfer of ownership can be done during a person’s lifetime by way of a deed or upon death by way of a Transfer on Death Deed (TODD) or as a bequest in a will or trust.
How and when ownership to the family property transfers to the next generation can have significant tax and other financial consequences which will not be addressed in this article. I encourage you to discuss these matters with your CPA and estate planning attorney before putting anything in place. We have addressed such matters in past articles for this column, and these articles can be found on our law firm’s website.
A Cabin Trust is one option for transferring the family lake property to the next generation. Generally, trusts are excellent estate planning tools. A trust is an agreement between the ‘settlor’ and the ‘trustee’ to hold property and other assets for the benefit of the named beneficiaries pursuant to the terms of the trust. The primary document is the Trust Agreement in which the ‘settlors’ establish the terms of the trust and also name the successor Trustee. The successor Trustee or Trustees are the individuals who will be responsible to carry out the terms of the trust.
A Cabin Trust can be tailored to the unique features of the family lake property and the needs and dynamics of the members of the next generation. Cabin Trusts can include purchase options, opt-in and opt-out provisions, and how ownership of the family lake property will be financed into the future.
A Cabin Trust typically becomes irrevocable upon the death of the settlors, and it becomes a taxable entity. Once irrevocable, the terms of the Cabin Trust are locked in and the successor Trustee and beneficiaries cannot change them. All trusts are subject to the rule against perpetuities, so they cannot last forever.
A Cabin Trust might be a good fit when the goal is to keep lake property in family and dictate terms; when there’s a strong leader among group of the next generation of family members who has the knowledge and capacity to carry out its terms; and when the goal is to pass lake property on to the generation beyond the next generation, i.e. grandchildren.
A limited liability company (LLC) is a modern business entity form and is essentially an agreement among its ‘member – owners’ to pursue a business purpose. Owning lake property as an investment can be the business purpose. An LLC must be registered with the MN Secretary of State and may have a perpetual existence. It offers its members a liability shield for personal assets from debts and liabilities that may arise in the operations of the LLC. Members have voting rights and are expected to participate in the management of the LLC in some manner.
A Cabin LLC is a good option when the goal is to keep the lake property in the family while allowing the next generation to manage the property together and determine the terms of joint ownership and use over time. It’s a good option when family members have strong interest in owning the property together; are responsible, communicate well, and get along with each other; and when the goal may be to provide the opportunity for extended family members to join in ownership. The Cabin LLC can carry on forever, if the family members so choose.
The primary governing document for a Cabin LLC is the Operating Agreement, and it establishes the purpose of the LLC, and addresses governance and management, financial terms, transferability of membership interest (buy/sell terms), and in the case of the family lake property, schedules for use and rules to be followed. It’s a flexible governing document that can be amended over time.
One final note on this subject, it’s important to remember that funding Cabin Trusts and Cabin LLCs with liquid assets ($$) in addition to real property is essential to their success.
Any requests for topic suggestions may be sent to firstname.lastname@example.org. Although we cannot give you legal advice through the column, we can provide some general information that may be helpful for you to know. Our purpose is to educate and we hope that you can take something new away from this column each time you read it.