| 30 June 2009
The family cabin is a right of passage for many Minnesotans and one that many of us want our children and grandchildren to experience for a long time to come. Just like we remodel our primary residence, many also remodel the family cabin to maintain a similar lifestyle for our weekend getaways. With so much money, memories and time invested, many families come to the conclusion that they want to pass the cabin on to the next generation and hopefully for generations after that. Yet doing so is often difficult due to the expense of a second home and the communication issues of many owners.
There are two distinct problems regarding the passing of a second home. The first concern is the issue of multiple owners. With multiple owners come multiple opinions, even when it is just brother and sister working together. While even the best relationships can be strained, it is better to discuss this in advance with the next generation and set the relationship up more like a business. One method we discuss with clients is transferring the cabin into a Limited Liability Company (LLC). There are many reasons for this but for this discussion the important one is the operating agreement. Just like if this were a business being established, an operating agreement would be put in place to lay out the ground rules, from how the expenses are to be shared to who gets the first right to purchase should one of the owners want to sell. And if mom and dad communicate this in advance the children will be that much more invested in the rules that are in the document. A solid operating agreement will set the next generation up for a better relationship as brother and sister.
The second issue to address is the cost of a second home might be more than your children or grandchildren can afford. For most families, it does not make sense to set aside a lifetime's savings just to fund cabin expenses, especially since that inheritance might be needed to help with college and even retirement expenses. I typically recommend setting aside five year's worth of cabin expenses (taxes, insurance, maintenance, initial upgrade expense) in the LLC mentioned above or even a trust to give the next generation enough time to understand what the financial ramifications are of keeping the cabin. If after five years they do not feel they can afford it, then it is best if they sell the cabin even though the first generation might prefer otherwise.
There is one more added benefit to this structure.
The first generation can begin gifting today (subject to the annual tax-free gifting limit) a percentage of the LLC to the next generation and begin moving the asset out of their estate without giving up control. It also helps to bring the second generation into the picture sooner while mom and dad can still influence their thinking.
Communication always makes transitions go smoother. And establishing a communication process for the future will increase the odds that the cabin does stay in the family.