In August, the sunsets arrive sooner, Labor Day appears on the horizon, and–in my family–we start making plans to eventually close up our family cabin for the winter.
At our cabin, we have a three-ring binder we call, “The Book.” “The Book” contains three generations of instructions on how to open the cabin in the spring, and how to close it up in the fall.
One of my favorite instructions in The Book is a handwritten note from my grandfather to my dad and his siblings. In light cursive script, but with a firm tone of voice, my grandfather reminds his adult children to “push the red button” before draining the water tank. In response, my dad wrote back, in a large, blocky scribble, “THERE IS NO RED BUTTON.”
We laugh about the lack of a red button on the water tank every year, but that one small detail illustrates how helpful it is for the next generation of cabin owners to have clear guidance from the previous generation on the ownership and use of the cabin.
Eventually, ownership of the family cabin will need to be transferred from one generation to the next. Legally, there are many different ways to accomplish that transfer of ownership, ranging from simple to more complex.
The simplest transfers would be a gift or a sale of the cabin from the parents to their children. Although lifetime gifts and sales are pretty easy for families to accomplish, there are disadvantages to both. The biggest disadvantage would be a loss of control over the cabin for the remainder of the parents’ lifetimes. There are also disadvantages associated with the cabin not receiving a “step up” in income tax basis that it would receive if the parents owned the cabin until they die. Speaking of taxes, if parents make a large lifetime gift, they will probably need to file a Form 709 Federal Gift Tax Return, even if no gift taxes are ultimately due.
Another way to “keep things simple” with a cabin succession plan would be to use what is called a “Transfer on Death Deed.” A Transfer on Death Deed does exactly what it sounds like it would do: At the death of the last of the parents to die, ownership of the cabin would automatically transfer to the beneficiaries listed on the Deed. This allows the parents to control the cabin while they are alive, and the cabin gets a full step up in income tax basis at the death of the last of the parents to die. After the death of the last of the parents to die, the “Grantee Beneficiaries” (as they are called on the Transfer on Death Deed) need to file an Affidavit of Survivorship and a Medical Assistance Clearance Certificate to put record title to the cabin in their names.
Of course, there are other options, too, such as the creation of Life Estate and Remainder Interests, the use of Co-Tenancy Agreements, the creation of a Qualified Personal Residence Trust, or simply doing nothing and allowing the cabin to pass through probate.
If the current generation of cabin owners is willing to spend a little extra time planning for the succession of the family cabin, the two most popular planning options are Cabin Trusts and Cabin Limited Liability Companies (“LLCs”).
Cabin Trusts and Cabin LLCs have become the most popular ways to transfer ownership of the family cabin from one generation to the next because: (1) The parents retain control of the cabin during their lifetimes, (2) the cabin will get a full step up in income tax basis at the death of the last of the parents to die, (3) the parents can exercise some “dead hand” control over the cabin after they are gone, and (4) if the parents fund the Cabin Trust or Cabin LLC with some cash, in addition to the cabin, then the parents can continue to help their descendants pay for the expenses of maintaining the cabin long after the parents are gone.
A Cabin Trust is an Estate Planning document. Some people like to have a Cabin Trust integrated into their overarching Revocable Trust, which may be the backbone of their Estate Plan. Other people like to have a separate, stand-alone Cabin Trust that holds only the cabin and additional cash to be managed separately from their other assets. The Cabin Trust contains instructions for a Trustee to manage the cabin for the benefit of the Beneficiaries of the Trust.
A Cabin LLC is a business document that is specifically drafted to manage a family cabin for successive generations. The most important part of a Cabin LLC is its Operating Agreement. The Operating Agreement of an LLC contains all of the rules and instructions for the owners (the “Members”) of the Limited Liability Company. A well-drafted Operating Agreement often contains “Buy-Sell” provisions which may limit transfers of ownership interests to family members.
Which should you use, a Cabin Trust or a Cabin LLC? It depends. Some people prefer Trusts because planning for the family cabin most often comes up in the context of Estate Planning, and they may already be familiar with the concept of using a Trust for other purposes. Other people may be more comfortable with the business-like nature of using a Limited Liability Company to manage the cabin.
Both Cabin Trusts and Cabin LLCs provide greater liability protection and greater creditor protection than outright ownership of the cabin, alone. Both Cabin Trusts and Cabin LLCs allow for a large amount of flexibility in their operation, to allow one or more of a person’s descendants to make decisions about the family cabin in the future, for the benefit of the whole family.
The decision between whether to use a Cabin Trust or a Cabin LLC, or another form of ownership transfer, is one that is best made after a thoughtful discussion with your Estate Planning attorney.
So, this August, as you and your family sit around the campfire and the stars slowly begin to appear in the sky, if you have a moment in between listening for the lonely call of a loon, and watching for the otter that might be out for a nightly swim past the beach, consider having a discussion about your family’s succession plan for the cabin.
You and your family may want to add a Cabin Trust or a Cabin LLC to your family’s version of “The Book,” to ensure your children, and your children’s children, will be able to enjoy the family cabin for many years to come.
J. Steve Nys is an attorney at the Fryberger Law Firm in Duluth, practicing in the areas of estate planning, trust and probate, business succession planning, income and transfer tax planning, real estate and general corporate/business law. You can reach him in the firm’s Duluth office at 218-722-0861.
