September 15, 2014
By: Gay M. Pomeroy
We are frequently asked by our clients how to keep the family cottage in the family and structure the ownership and governance of the same to meet their goals. These questions are frequently asked by older owners who are at an age where their assets will begin to pass down to children, grandchildren or other relatives.
The problems tend to arise when these types of properties end up with multiple owners. Multiple ownership can bring its share of problems, including dissatisfied owners causing family strife, owners with creditor problems, owners who may incur catastrophic medical expenses such as nursing home costs or owners who are financially unable to bear their portion of the costs. Such problems may enable a dissatisfied owner or a creditor to force the sale of the property through a partition action. Such a forced sale would defeat the family goal of maintaining the property intact for future generations.
Families who are facing this issue but wish to keep the property in the family should consider some planning to accomplish their goals. The way to do this is to provide for an entity to hold the property so as to remove it from the individual issues discussed above. There are two types of entities that can accomplish this: one is a trust, and the other is a limited liability company (LLC).
For real estate located in the State of New York, the creation of a trust would be less expensive in terms of startup costs and annual fees as compared to an LLC. However, New York trusts are limited by New York Statue by the rule of perpetuities. This law provides that trusts can only last for ‘lives in being’ at the time the trust is created plus 21 years. Depending on the family makeup, this could be for a considerable time but would not be indefinite.
The other choice is an LLC which is similar to a corporation. Such an entity can last indefinitely with the ownership units being passed down to succeeding generations.
Clients should keep in mind that no matter what entity is chosen to hold the family cottage, there have to be provisions for the governance of the same included in the documents. I have found in my practice that each family has different considerations for governance so that the provisions may differ from family to family.
In addition, some family members who wish to pass the family cottage down to succeeding generations may choose to fund the trust with cash bequests in their wills or through life insurance to give the entity some funds to help with the maintenance costs, thus making it easier on the families.
Having well laid out plans, which you have discussed with the younger generation, will be the key to keeping your cottage within your family.