Although your modest family cabin and the idea of estate planning might feel pretentious, planning ahead to ensure that the retreat stays in the family is a smart move long-term.
The idea of “estate planning” can seem overwhelming. And when you’re looking at a modest, quaint little family cottage or cabin that doesn’t seem to qualify as a regal “estate,” the idea of estate planning can seem a little pretentious. But what we’re talking about here is simply planning ahead to ensure that the beloved family retreat stays in the family.
Joint tenancy with rights of survivorship: Two or more people have equal ownership interests in the property, and when one person dies, his/her share goes to the surviving tenant.
Tenants in common: Two or more people have ownership interests in the property, but the interests don’t have to be equal. Unlike joint tenancy, there are no rights of survivorship, so a person is free to dispose of his/her interest to a new owner (unless prohibited by the legal agreement).
Retained life estate: The owner of a life estate retains ownership of the cabin during his/her lifetime, or the life of another, with the property going to the remainder interest holder after the death of the life estate owner.
The primary benefit of a direct transfer of ownership is the ease of the transaction. A direct transfer occurs by drafting and recording a deed transferring a cabin interest (typically to just one new owner), and there is little cost involved.
Another vehicle for passing along cabin property is a trust agreement. A trust is an agreement where a grantor transfers property to a trustee so he/she can hold, manage and distribute the trust to the benefit of all the trust beneficiaries.
There are several forms of trusts that can be utilized for a cabin plan. Trusts can be either revocable or irrevocable, and there are several important considerations that may dictate which form of trust is right for your family. It is important to consult your attorney and review the different forms of trusts and their application to your circumstances and objectives.
The trust agreement is the governing document for a trust. It is an excellent tool for laying out the terms of the agreement between the new cabin-interest holders (the trust beneficiaries). Trusts are also popular because estate planners are familiar with trust agreements, and trusts have fewer legal formalities than business entities (below) do. Finally, trusts are commonly utilized because they are less expensive to draft and implement than more detailed ownership options, such as family business entities.
The negative consequences of trusts generally deal with the lack of flexibility when administering a trust. Certain forms of trusts cannot be amended to address changes in circumstance among the beneficiaries or with the cabin property (for instance, who is allowed to vote on changes to the trust agreement). Trusts also can be cumbersome for dispute resolution and property management. When compared to other forms of ownership, trusts can have inferior liability protection for family members.
The Olsons, like many Midwesterners, have had a family cabin for many years. It has been frequented by Ed and Edna Olson, their three adult children and several grandchildren. Upon Ed and Edna’s deaths, the property was conveyed from the estate to their three children, in equal shares, as tenants in common.
Mr. and Mrs. Olson did not foresee any difficulties with the succession of ownership and management of the cabin. But, over time, one child began paying most of the taxes and maintenance costs and spent a lot of time and effort on maintenance. Few improvements were needed, but a new roof may be necessary in the future.
The other two children justified to themselves that their brother, a physician, had the best ability to pay the costs due to his financial resources. Further, they claim that he used the property the most, given his proximity and that of his children. The second adult child lives on the East Coast and rarely uses the property with the exception of the week of the Fourth of July. In addition, she doesn’t have children and her husband doesn’t enjoy making the trip to the Midwest every July. The third adult child is an avid fisherman and boater, uses the property a couple of times a month and doesn’t chip in much on maintenance or other needs. Finally, the cabin can’t accommodate all three families at one time.
Given the differing perspectives, economic considerations, lack of space and use conflicts, trouble is brewing for the Olson family cabin.
If Ed and Edna put more thought into the succession of the cabin and discussed these issues with their children, much of the conflict and uncertainty could have been avoided. Simply leaving your legacy property to your heirs “in equal shares” means that everybody must agree on every aspect of owning, maintaining and enjoying the property.
A cabin plan could have settled these issues in advance and set forth a path for future use and enjoyment by those who desired the opportunity.
Asset Distribution: The transfer of an asset from the estate to the beneficiary.
Deed: An instrument of conveyance used to transfer an interest of real property.
Estate: The property and rights of a decedent which exist prior to the distribution of that property in accordance with a will, trust or pursuant to applicable intestacy provisions under state law.
Estate Administration: The process of settling an estate. It involves the inventory and valuations of assets, the payment of expenses and taxes, and the distribution of the remaining assets to the beneficiaries.
Estate Plan: The plan to execute an individual’s wishes as to the administration and disposition of property before and after death.
Grantor: An individual who establishes a trust and transfers property to the trust.Interest: A share of the ownership of a property.
Irrevocable Trust: A form of trust which cannot be revoked, amended or cancelled.
Joint Tenancy with Rights of Survivorship: A form of property ownership where two or more individuals own an equal and undivided interest in property. When a joint tenant dies, the surviving joint tenant(s) acquires the interest of the deceased joint tenant.
Life Estate: A conveyance in property where the life-interest holder retains rights and benefits of ownership during their lifetime, or the life of another, with the property going to the remainder-interest holder after the death of the life tenant(s).
Limited Liability Company (LLC): A business structure allowed by state statute where the owners have limited personal liability for the debts and actions of the entity. In essence, the liability is limited to the property contributed to the entity. An LLC is treated as a partnership for tax purposes and receives the benefit of pass-through taxation.
Operating Agreement: An agreement between members of an LLC governing the LLC’s business and the member’s financial and managerial rights and duties.
Revocable Trust: A form of trust which may be revoked, amended or cancelled by the grantor(s). A revocable trust is commonly referred to as a “living trust” because it is created during the lifetime of the grantor(s).
Tenants in Common: A form of property ownership where two or more individuals own an interest in property. One tenant may have a larger share of the property than the other tenant(s). Unlike joint tenancy, there are no rights of survivorship and the tenant is free to dispose of his/her share of the property to a new owner (absent an agreement that would prohibit this).
Tenants in Common Agreement: An agreement between tenants in common used to establish the rights of each tenant in the property they share in common.
Trust: A relationship where a grantor transfers property to a trustee to be held, administered and distributed for the benefit of the trust beneficiaries.
Trustee: A person who assumes the responsibility to administer a trust for the benefit of the beneficiaries of the trust. A trustee is a fiduciary who generally owes the highest duties to the beneficiaries of the trust.
See also 10 Keys to Family Fun
Pros: An easy transaction; low cost to establish.
Cons: Little or no protectionfrom creditor claims anddivorce of a newinterest holder; lacks methods for resolvingdisputes or transferring interests
Pros: Excellent tool for laying out a road map of agreement between the new cabin-interest holders; estate planners are familiar with them; simpler (fewer legal formalities) than LLCs; low cost to establish.
Cons: Inflexible; cumbersome for dispute resolution and property management.
Pros: Perpetual existence; flexible for amending; limited personal liability; creditor protection.
Cons: Its formalities makeit complex; costly to establish andmaintain
YOUR FAMILY’S CABIN PLAN: Be sure to address important sharedownership considerations, such as maintenance, cost sharing and budgeting, use,dispute resolution, creditor protection and other considerations relative toyour family’s situation and long-term goals.
TAXATION: With all forms of ownership transfer,there may be income-, gift- and estate-tax implications. Prior to executing thetransfer, there must be a complete analysis of the estate, gift, income andproperty taxes to prevent unintended tax consequences.