The above scenarios are all too real outcomes for properties with shared ownership. The transfer of a cabin or recreational property is more emotionally loaded than other property transfers between family members as they typically involve a property with multiple uses, often located in environmentally pristine areas, and tend to embody the family’s values and sense of identity.
Shared family property, passed down to the next generation, can and does create some very real challenges in reaching family consensus. Beyond the emotional connections, these properties are often located in desirable areas where the property values have increased at a rate far beyond the family’s other assets and often represent a large percentage of the families’ holdings. This can pose unique estate tax and liquidity issues for senior generations and for some junior generations, the financial burden of keeping a cabin in family may be more than they can handle.
According to Minnesota Attorney Joel Mullen, family disputes over property are all too common. “The real problem when you have multiple owners of one property is when one person decides they want to get out. The evaluation of the land then becomes a big issue.” “Say the property is worth six hundred thousand,” explained Mullen, “split between three siblings is two hundred thousand each. Now, one of the families does not want to be part of the property anymore. Either they don’t use it as much, or at all, or feel their share of the money is worth more than the family asset.” “They then ask the siblings to buy them out,” Mullen continued. “The siblings have no real interest in buying out the one wishing to leave, as they get to use the property as much as they want anyway. They would then only assume the financial burden in buying out their sibling coupled with additional of taxes, maintenance and upkeep. They feel there is no financial incentive to buyout the one who wants to leave.” “The one who wants to leave,” added Mullen, “simply and understandably, wants their one-third share. In their mind, they believe their interest is two hundred thousand, not realizing their only potential buyers are the remaining siblings, of who feel they should get the property at a discount because they are, at least initially, the only potential buyers.”
“When the others do not oblige paying two hundred thousand,” said Mullen, “they feel cheated out of the share of the inheritance.” “The dirty little secret,” he added, “is the sibling who wants out can, and most often do, get their share by simply suing their siblings.”
For most owners of a cabin or hunting property, passing down that legacy to the next generation, and generations to come, is something they take a lot of pride in, and the scenario Mr. Mullen described is not what they envision happening. “The biggest misconception many property owners have,” said Mullen, “is the property will always stay in the family.” “Without proper estate planning,” Mullen added, “there is no way to ensure the property will stay in the family.”
Regardless of how a family reaches a point where brother sues brother, such cases not only put a strain on the family but put a financial hardship on the other owners, such where the land cannot be kept. “All it takes,” reminded Mullen, “is when one person wants out.”
Many Deeds or Wills stipulate the heirs own the property together through tenants in common or joint tenancy. These concurrent forms of ownership include two or more persons who possess the property simultaneously. According to Mr. Mullen, when property is owned jointly, the property is subject to whatever is going on in each owner’s life. “Someone needing their share in financial return may not even be happening by choice,” said Mullen, “a bankruptcy, in particular, will have an effect on every joint owner of the property.”
“The problem in a nut-shell,” explained Mullen, “but still a rock in a hard place, is how do you solve a problem between two perfectly reasonable people who both happen to be one-hundred percent right?” “Many of these disagreements are simply that,” said Mullen, “one party wants their share of the inheritance in lieu of using the property, the other party simply does not want to pay them for something they already own. Neither are wrong.”
One of the tools recreational landowners can use to circumvent these types of disagreements includes trusts. According to Attorney Michael W. Vogel, from Wisconsin, there is a difference between common estate planning and planning necessary for recreational property. “Most wills and estate planning tools distribute assets either equally or unequally to a person’s chosen beneficiaries,” said Vogel. “In regards to recreational property,” he added, “each of the beneficiaries may have equal shares in one asset. The question then becomes, if an owner leaves the land to four brothers and sisters and they don’t get along, or they have different views of what should be done with the property, what then?”
Vogel recommends using, what he calls, a Cabin Trust. “A Cabin Trust, is a type of revocable trust which can be changed and dissolved up until the death of the maker.” “The trust agreement is administered by one or more trustees,” added Vogel, “who can be a family member or a neutral third party. The beneficiaries, rather than being tenants in common, all become recipients of the trust. This type of trust is a tool which can be used with any type of recreational land, lake-home or cabin you want to keep in the family.
The structure of the trust creates a framework to eliminate arguments.” “For example, “Vogel said, “language in the trust could detail how the cabin is to be used, who gets what weekend at the cabin or who hunts what weekend at the farm.”
The trust can also manage income as well. “If there is rented cropland on the farm,” said Vogel, “the trust will be the recipient of the incomes and will have resources to pay for taxes and other expenses.”
Vogel advises setting up a separate trust for the property itself, due to long term management and use. “If it’s just a sole heir this is not an issue,” said Vogel “the more owners, the more heirs the more opportunity for disputes.”
With guidance from an attorney, a trust can also address how taxes, maintenance, and other financial considerations are managed.” “A trust simply addresses all the ambiguity,” said Vogel. “All the terms are laid out beforehand by the creator of the trust, which often does include the beneficiaries.” “The trust also offers creditor protection,” Vogel added, “which is not the case with common ownership on a deed.”
Limited Liability Company
Another tool that can be used to transfer ownership to the next generation is forming a LLC or “limited liability company.” I asked Minnesota Attorney Joel Mullen which course of action a landowner should consider. “When there is unequal interest of the parties involved in the property,” said Mullen, “then in my estimation using an LLC is the preferred method. It allows you the opportunity to address unequal issues through shares.” “However,” he added, “because of Minnesota’s favorable case law regarding asset protection for non-self-settled trusts if there is equal interest, such where the children are all treated equally, then I prefer to use a trust.”
“The truth of it is,” said Mullen, “common wills and case law can help keep the property in the family, but a trust or LLC will ensure the family will get along in the future.”
Deciding on an LLC or a trust to pass down the cabin to the next generation is a decision best placed in the hands of a reputed estate planning attorney. But if you want to keep what you worked so hard for in the family, and want to ensure your family members get along after you are gone, consider visiting with an attorney about an LLC or a trust. These tools can manage, for generations to come, what may be your most cherished family asset.