A family cottage, vacation property, cabin—or whatever name the family members may use—can be a great source of family harmony and enjoyment. However, failing to plan for the transition of the property for future generations can become a source of bitter disagreement and burden.

It is helpful to take a look at a process that may help to avoid family discord. Before a plan to transfer the family cottage to the next generation can be implemented, the family needs to reach a consensus regarding the goals for the property. A plan imposed by a senior generation upon the junior generation is almost always doomed to fail.

The most successful plans require detailed and thoughtful advanced planning involving both generations. The process of coming to an agreement is usually accomplished with a series of family meetings and most successful when using a facilitator. The use of a facilitator or neutral third party is highly beneficial in identifying areas of consensus and resolving areas of dispute.

Left to their own devices, owners will often choose the least expensive and easiest method to add members of the next generation: joint owners with rights of survivorship, or completely transferring the property to the next generation during the owner’s lifetime by deed. Although easy to implement, these types of lifetime transfers can often have unintended consequences, and do not address many important considerations (see right).

Important Considerations

  • Who gets use of the family cottage and when?
  • How is general maintenance handled and financed?
  • How are capital improvements (i.e. additions or infrastructure) handled?
  • Is there a process for when disagreements arise with regard to paying for expenditures?
  • What is the process used to determine value or sell an interest, and what types of transfers are allowable?
  • What can be done to limit exposure to liabilities (i.e. injuries on the property, creditors, or divorce)?

A better choice for many families may be the use of a Limited Liability Corporation (LLC) which offers a great deal of planning flexibility and can be used in conjunction with either a direct transfer or through a trust. The LLC agreement can specifically spell out the rules and procedures for the use and operation of the family cottage, and has more favorable tax treatment than a trust. This is especially true if the family cottage generates income or if the senior generation intends to fund the LLC with a substantial endowment to maintain the property.

The generational transfer of the family cottage is unique for every family. Seeking the advice of a trust and estate attorney will help determine what the best transition plan is for your family cottage and assist with avoiding family conflict and unintended consequences. Through proper planning, the family cottage can remain as a unifying force for the family long after the senior generation has passed away.

For more information on how to begin the process, contact one of our professionals today.