By Dan Barney
Estate Planning & the Law
Vacation property can become a family legacy. Keeping your cabin, fishing lodge, hunting property or other special assets separate for future generations is often a special goal for a family.
To do so families may want to establish an entity to keep that asset in the family for several generations.
A Family LLC, partnership or trust can be used to accomplish this goal. A family should evaluate several considerations in structuring the management of such an LLC.
• Factors to Consider. In each case it is wise to develop a written agreement. For the LLC this would be an operating agreement, which would address management and administration, conflict resolution, property maintenance and financial issues. This agreement should encompass:
A. Who Will Manage. Name two or three persons to manage the property. This should include the parents or grandparents who set up the LLC or Trust but later should include representatives of different branches of the family.
B. Who Will Own:
1. Develop rules for transferring and using the property. A buy-sell agreement may provide a method to sell the property or to limit that sale with a first right of refusal to family members. Usually any transfer to other than lineal descendants may require a vote that is either unanimous or near unanimous (80% or more).
2. Sometimes, ownership is limited to lineal (blood) descendants only, not the spouses of descendants.
3. Include a provision for a future family member to opt out. How can he sell, to whom can he sell, and how is the price established?
C. Financial Considerations:
1. How are expenses paid? A special endowment can be included as a part of the LLC or as a separate trust whereby money or investments are set aside for taxes, maintenance, insurance, etc., and future capital requirements. This method is, however, limited by the unknown nature of future requirements.
2. Annual Fees/Assessments. If the endowment is insufficient, an agreement may provide for annual payments by family members. How are these payments determined? They may be proportional to ownership or proportional to the extent of usage, i.e. $xx/week. Of course, provision must be made if some family members fail to pay their share.
D. How to Manage Use of Property:
1. The parents, who establish the LLC/Trust, etc., may reserve lifetime use for themselves.
2. The two-three managers should establish rules for scheduling use (particularly during desirable times, i.e. Christmas, summer holidays, etc.).
A family entity can be a good way to keep sentimental vacation property within your family. Various forms of entity are available to accomplish this goal.
However, although desirable for you, your children and grandchildren, it is also wise to realize that practical operations of such an entity for those generations below grandchildren may be impractical because of the number of descendants using the property and the hands-on problems of administration.