Suppose, for example, that a cabin’s original owner dies, and the property is passed in equal shares to the owner’s four children. Here are a few potential conflicts that could arise:
One child wants no part of the cabin and demands an unreasonable sum for his ownership interest.
One child wants total ownership of the cabin but cannot afford to buy out his siblings.
One child remarries and the new spouse asserts different opinions about the use of the cabin.
One child moves out of state and no longer wants to contribute to maintenance and other costs.
One child is unhappy with how the cabin is managed and forces a sale of the property.
One child’s teenage son damages a neighboring property and the sibling-cabin-owners are sued.
All the children want to build a deck but disagree on size, materials and cost.
Disputes surrounding the legal aspects of ownership, such as taxes, liability and buyouts, as well as the daily aspects of ownership, such as maintenance, expenses and schedules for use, can significantly undermine your family’s history, traditions and memories of good times shared at the cabin.
Now for the good news: With proper estate planning, you can preserve the cabin for future generations and avoid many of the conflicts that can arise from shared ownership. Here is one tool that can help.
Family Limited Liability Companies
One popular estate-planning tool is the family limited liability company (FLLC). An FLLC is a business entity formed among family members for the purpose of owning and managing the cabin. With an FLLC, the company owns the property, and its members own a share of the company.
The FLLC is governed by an operating agreement or similar document, which sets forth the rules of membership. These rules typically outline the members’ percentage interests in the FLLC; members’ rights, entitlements, responsibilities and voting powers; how the FLLC will be managed; decision-making protocols; use schedules and other essential information.
The agreement should also outline the terms of any buy-out provisions which dictate what happens when a member dies or wants to sell his interest in the property.
FLLC Advantages
The family limited liability company operates like a general partnership but provides many of the protections of a corporation. It is extremely flexible; unlike a trust, an FLLC can change over time as the needs of its members change.
An FLLC allows the family to restrict ownership in the FLLC to certain family members. Only those who are interested in using the cabin need to participate in the FLLC. Outside third parties – such as new spouses – can be excluded from membership.
FLLCs are run democratically by their members. Major decisions, such as building a deck, can be determined by a majority vote of the FLLC members. Minority members unhappy with the decision cannot force a sale of the property.
Another significant advantage of the FLLC is that, since it is a separate entity, it limits the liability of its members. Therefore, if a lawsuit is brought against the FLLC, individual family members cannot be personally sued. An FLLC also protects the company’s underlying assets (the cabin) from the claims of creditors in the event of a bankruptcy, tax lien, court judgment or claims of a non-family member spouse in the event of a divorce.
Depending on state law, the FLLC can exist perpetually; its life can extend beyond the illness or death of its members. As family members change, there is no need to re-title the property, and only those who are interested in enjoying the cabin need to participate as members.
Finally, an FLLC also offers tax advantages. While a corporation is taxed at both the corporate level and the individual (stockholder) level, an FLLC allows members to avoid double taxation; the tax is “passed-through” to the individual members.
FLLC Disadvantages
Family limited liability companies also hold certain drawbacks. Most importantly, FLLCs are formal legal entities that must be operated pursuant to the requirements of state law. These requirements may include annual filings with your state’s secretary of state’s office and, in some states, holding annual meetings. If members fail to follow the formalities of the FLLC or fail to establish and follow an operating agreement, a court could disregard the entity and treat it as though it did not exist.
In addition, establishing an FLLC requires time, money and, in many cases, the assistance of an attorney. The family will need to draft and file articles with the secretary of state. The family must also meet and determine the rules that will be set forth in the operating agreement with regard to maintenance, scheduling, valuation, buy-out provisions and other issues.
Since estate planning is a complex process, and laws governing FLLCs vary from state to state, you should consult a real estate attorney before determining if an FLLC is the right estate planning tool for you. However, taking the time to plan ahead will go a long way in preserving your cabin for future generations.
Sally Kane is an attorney and freelance writer who hopes to keep her cabin in the family for many generations to come.
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