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Passing Down the Family Cabin

April 23, 2018 | Sam Rouman CFP®, CLU, ChFC, AIF®, Wealth Advisor

The family cabin often holds many memories and nostalgia, especially for multi-generational families, and for some for whom a cabin was the only “vacation” spot they ever knew.

Trouble for the Olson Family

The Olsons have had a family cabin for many years. It has been frequented by Ed and Edna Olson, their three adult children (Elijah, Edith and Edwina) and several grandchildren. Upon Ed and Edna’s deaths, the property became owned by their three children.

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 Elijah, 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. Edith 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. Edwina 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. As you might guess, trouble is brewing for the Olson family cabin.

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.

The idea for many families is that they will pass the cabin down from one generation to the next. Sounds great. However the idea of this oftentimes runs up against reality. It is somewhat naïve to assume that all the family members, including subsequent generations, will want to continue their shared ownership forever, or that everyone will want to sell all at once.

Also keep in mind that all family members suffer when someone is forced to remain against his/her will. A reluctant co-owner is never a good partner, and his/her resistance to contributing enthusiastically to the family co-ownership, and desire to create conditions that will lead to an exit opportunity, will inevitably interfere with the enjoyment and benefits of shared ownership for the others.

The cabin plan – a potential alternative

A cabin plan is an extension of an estate plan. Rarely will an estate plan cover the issues related to passing down the ownership and management of the family cabin property. A cabin plan attempts to eliminate the complexities related to shared ownership and it works to keep the property in the family for generations.

Factors to consider

Developing a cabin plan requires forethought and a long-range view. In doing so, cabin owners should involve the entire family in the planning process. In addition, cabin owners should confirm that each prospective new owner actually has an interest, or is willing to become a cabin owner! Too many times, it’s assumed every child wants ownership. However, factors such as financial considerations, geographic distance, and time can impact the desire to become an owner.

As expected, there is no one-size-fits-all planning option or form of ownership for the transfer and management of cabin property.

Cabin trusts

Trusts can be either revocable or irrevocable, and there are several important considerations that may dictate which form of trust is right for the family.

The trust agreement is an excellent tool for laying out the terms of the agreement between the new cabin-interest holders. There can be negative consequences of trusts, so it is important to understand the differences.

  • Your family’s cabin plan: Be sure to address important shared ownership considerations, such as maintenance, cost sharing and budgeting, use, dispute resolution, creditor protection and other considerations relative to your 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 the transfer, there must be a complete analysis of the estate, gift, income and property taxes to prevent unintended tax consequences.

The need will arise to alter the structure of ownership of the entity due to changes in family circumstances over time. The changes may impact the overall management provisions of the entity (governance) or the operational provisions (the day-to-day property maintenance and improvements). Either way, the ability to make these changes is very appealing to some.

A plan for the cabin is a critical part of an estate plan that ensures the succession of a key asset to family members well after the original owner has passed on. Planning early gives peace of mind that the succession objectives will be met and fosters communication among the family regarding their interest and intent. In addition to planning early, it’s important to revisit the plan over time when a change in circumstance arises.

 

This information is intended to be educational and is not tailored to the investment needs of any specific investor.  BerganKDV Wealth Management does not provide legal advice. The information herein is general and educational in nature and should not be considered legal or tax advice. Tax laws and regulations are complex and subject to change, which can materially impact investment results. BerganKDV cannot guarantee that the information herein is accurate, complete, or timely. BerganKDV makes no warranties with regard to such information or results obtained by its use, and disclaims any liability arising out of your use of, or any tax position taken in reliance on, such information. Consult an attorney or tax professional regarding your specific situation.

Investment advisory services and fee-based planning offered through BerganKDV Wealth Management, LLC, an SEC Registered Investment Advisor. Securities offered through Valmark Securities, Inc. Member FINRA, SIPC- 130 Springside Drive Suite 300 · Akron, Ohio 44333-2431 · 1-800-765-5201 BerganKDV Wealth Management, LLC, is a separate entity from Valmark Securities, Inc.

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