Using an LLC to Keep the Family Cottage In the Family
The treasured family cottage, cabin or camp is a place where memories are created and special family bonding takes place year after year. There are probably thousands of such places in Maine. Owners often wish to create a legacy by passing this family jewel on to their children and future generations. Unfortunately, the difficulties inherent in having multiple owners often thwart this desire as the number of owners in the future generations grows.
It is very likely that one or more of the future generation owners will no longer want to own a share of the family cottage, be unable to afford to pay for the upkeep of the cottage, want to leave his or her share to an “outsider” spouse, or need money and resent the fact that the value of the cottage cannot be tapped. If the ownership of the cottage is administered solely by Maine law or general common law ownership principles, it is very likely that disputes will ensue over ownership, inheritance rights, and use of the cottage. Partition actions that can destroy a family are not uncommon with family-owned cottages with many owners, especially when ownership involves multiple generations.
How an LLC Can Help
Using a limited liability company (“LLC”) structure, by transferring the family cottage, cabin or camp to an LLC owned by family members, creates a vehicle that can address many of these potential issues. A properly drafted LLC agreement establishes rules and protocols the generations of family-member owners must follow and should address at least the following subjects:
- Who are the permitted members of the limited liability company (and thus indirectly the owners of the cottage). This should include limits on transferability (both during a member’s lifetime and upon death), and address whether spouses or other persons who are not descendants of the original owners are permitted members.
- A governance system for LLC decisions, including those relating to use and operation of the cottage.
- Under what circumstances and terms the sale, transfer or termination of a member’s interest in the LLC may occur. This may include an outright prohibition on transfers outside the family, or at a minimum a right of first offer in favor of the other family members of the LLC, and an agreed-upon valuation methodology. The valuation provisions often include a discount price paid for the interest of a member.
- Each member’s obligation to contribute to the maintenance and improvement of the cottage, including provisions setting forth what happens when a member fails or refuses to participate in the financial obligations.
- A sharing system pursuant to which the use of the cottage is divided among the family members. There are various models to choose from.
- Whether the cottage may be rented to non-family third parties.
- Whether the cottage can be mortgaged for financing purposes.
- Adopting an annual budget, and development of capital improvement planning.
- The terms and conditions upon which the sale of the cottage may occur.
An LLC structure can be especially beneficial for large families. As future generations become owners of the property, the LLC will likely end up with numerous members. For large families, establishing a “branch” system can simplify the management, use and operation aspects of the ownership. For example, if there are four children in the family, the parents can prepare an LLC agreement that creates four ownership divisions, each controlled by one of the children and their heirs. Each family division, or “branch”, is represented by a manager appointed by the respective families. Inheritance or transfers of membership interests in the LLC can be maintained within each family branch so that no one family branch becomes overrepresented, which protects a family branch that may have fewer members. The branch concept assists with scheduling, improves the likelihood of collecting member assessments, and preserves the power structure originally intended when the property is transferred to the LLC.
An LLC can be a useful tool to create a “cottage succession plan” that allows families to create an ownership structure that reflects family values, history and personalities, and to help ensure the cottage stays in the family for generations to come.