The family vacation home, condominium or cottage is an integral part of those wonderful family get togethers with the entire family. Parents often want to leave this property as a treasured legacy and gathering place to their children and grandchildren. Generation one has a strong desire for the property to remain in the family for the harmonious use of generations to come. Yet, harmonious use can be problematic without planning.
“Legal Title” of a Legacy Property
Proper legacy home planning requires that legal “title” to the property be held by someone other than the family members in their own names. We usually recommend a trust, an LLC (limited liability company) or an LP (limited partnership), so our clients don’t have a direct ownership interest, but rather they own a membership interest/unit in a limited liability company, for example. The limited liability company owns the cottage, its furnishings and the accompanying toys. The LLC’s Company Agreement (bylaws) governs and controls the rights, responsibilities and obligations of the various members. If it’s a well drafted operating agreement that provides structure it will go a long way to making this harmonious legacy come true.
We recommend prior to investing in setting up this legacy our clients:
#1. Discuss your vision with your children.
Determine whether or not
#2. Consider the children’s possible change of circumstances.
- One of the children divorces. Is it possible that as part of the divorce, the child’s spouse could end up with his/her ownership interest? or
- One of the children passes away and his/her spouse inherits the interest and remarries. Is it possible that the surviving spouse’s new partner could end up with the interest or worse, the new partner’s children from a previous marriage? or
- The child’s creditors attaches the interest?
The solution is to build into the Company Agreement or governing document the circumstances of a possible sale. Perhaps a right of first refusal to the other family members is appropriate? The Company Agreement can have other transfer restrictions and specifically indicate to whom a transfer of interest can be automatically made, to whom a transfer may be made upon the vote of other members and to whom transfers cannot be made at all.
- One or more of the children fall on difficult financial times and cannot help contribute to the upkeep of the property?
The solution includes adding to the governing document specifics setting out the amount each member is to provide for upkeep every year and set forth particular consequences if not paid, i.e., loss of use and eventually relinquishment of membership interest and logistical issues as use and occupancy among members, specific time carved out for rental to nonmembers, etc. Carefully crafting the governing document and including specifically how a member would be dealt with it they wanted to sell their interest. The sale could be prohibited to include only the other members and based upon a particular set reduced formula valuation and with a payout over time.
It becomes clear that with well-drafted language in an Operating Agreement making everything specific, harmony can be achieved and maintained for generations to come. So please, bring on summer!
By: Erin Thrash