For many families, sharing and caring for the family retreat can be challenging when multiple, related people are involved. The best way to plan for the maintenance and legacy of a family cabin with multiple owners for generations to come is to set up a legal structure such as a trust or limited liability corporation. But that’s only a start. No matter the contracts and ownership agreements you have, there are bound to be issues and challenges that arise over the years. And because it is a family matter, the players involved are likely to deal with issues in a more personal way – for better or worse.
Surprise Expenses and Shared Costs
David learned the hard way that it’s sometimes best to have a mediator help his family discuss subjects of ownership and finances. The lesson came after a tree fell on his family’s Adirondack camp. Their camp has been in the family for three generations, starting with his grandparents in the 1950s.
A few summers ago, a bad storm knocked over a tree that went through the roof of one of the buildings on the property. Thankfully no one was injured, but the damage was costly. David says he and his two sisters agreed that the camp could use some updating beyond the roof repair, but that’s about where their agreeing ended. Based on each sibling’s financial situation and proximity to the camp, they could not agree on how or what to do with the camp. David and his sister Stacy wanted to make sweeping improvements, whereas their sister Julie was reticent to spend too much because she had a young child, had relatively limited time to spend at the camp and lived much farther away than the others.
After much discussion, they discovered that it would be next to impossible for all to agree, so the three decided to split the camp three ways. All three would own the property but David would own the summer building that’s not winterized, Stacy would get the winterized building, and the remaining lake frontage would be Julie’s to build a brand new structure.
The discussions were often a strain on their sibling relationships at the time. “There was a fair amount of heated discussion and hanging up the phone on each other. There were times that I thought this is too much stress, and maybe I’ll just walk away from the whole thing,” says David. But all of his kids wanted to keep the camp as part of their future, so he persevered. Once all the decisions were made and responsibilities determined, the stress and strife dissolved, says David.
Now he and his siblings have a tenancy in common agreement, where they are all equal owners of the property but have individual responsibility for their respective areas. They split the homeowner’s association dues and property taxes three ways and jointly share use of the one boathouse. (Note: A tenancy in common agreement does not have right of survivorship, meaning that on the death of a co-tenant, the decedent’s interest passes according to the decedent’s will or other dispositive mechanism.)
If he were to do it all over, David says he would suggest the three of them sit down with a mediator to discuss their individual goals for the camp and the desires of each separate family. “Emotions run high,” he says and looking back it would have been helpful to have a third party to help them sort it out.
The Two Cs: Communication and Clarity
Barbara Stowe, Ph.D., a clinical psychologist based in Lake Placid, N.Y., suggests that when families must discuss difficult issues such as finances and property ownership, they each need to have a specific plan to present to the group. She says face-to-face meetings are best for difficult discussions because everyone hears the same information at the same time and it gives all an opportunity to ask questions and discuss the ramifications of their decisions.
Dr. Stowe says not to forget the two C’s to make discussions more successful: communication and clarity. After all, she says, “Remember when dealing with a family situation that you are stuck with each other for the rest of your lives. The importance of healthy family relationships is worth considering as a part of making decisions.”
The Legal Stuff
Peter Bertine, a retired New York attorney who now works as a legal and financial consultant says that to avoid problems it’s best to set up the family property in a family trust or limited liability company (LLC). That way, the management structure for the property is made explicit and all members know and understand how decisions are made.
For example, Alison and her husband Keith own two lakefront cabins in northern Minnesota – one they rent out exclusively and one they and their families use. They own the rental cabin with a family member and a friend and have it set up as a LLC. Considered the most flexible legal tool for managing property, an LLC is a business entity formed for the purpose of ownership and management of the cabin. The entity must be operated as a business under the requirements of state law, including maintaining accurate business records. Control over the LLC’s assets can be vested in all members or in one or more managers.
With three airline pilots in the group and a volatile airline industry, it has crossed Alison’s mind that they could be faced with some tough financial decisions if one or more owners is laid off and could no longer afford to remain as an owner. Their plan is that the other owners would have the first option to buy the other’s share of the cabin and if that wasn’t possible, then all three parties would sell.
However, for the family cabin, the agreements are different. Alison and her husband, Keith, own the cabin with Keith’s brother Tim. All costs associated are split equally between the two families. Both families want to keep this cabin in the family for generations to come and if there were to be a financial hardship with either owner, Ali says unflinchingly, “We’d take care of each other.”
Bertine recommends leaving room within your family ownership agreements to make decisions on a case-by-case basis – for the very reason that families tend to want to take care of each other in troubled times. He says this can be done within either a LLC or a trust. Typically a trust will have two or three trustees appointed to make decisions about how the property is to be run. These trustees can rotate and be voted in or out by the members, much like a homeowner’s association. Bertine says that typically the trust’s treasurer sets up a financial tracking system and in the event of financial hardship of one member, the member asking for a reprieve would then be running a negative balance in their account until they can make it up. If the hardship were to go on too long, the trustees can decide how to resolve the matter.
For Ali’s family, she says their plan in the event of a financial hardship would be for the other owner to take over the financial responsibility and then all owners would have to decide how to cut back on annual improvement projects and expenditures until the financial hardship was resolved. Otherwise one family would buy out the other, or they would sell the cabin all together. “We would first try and take care of each other and only sell if we had to,” says Alison.Bertine says that “there are a number of ways to share ownership, management and expenses so that the property is preserved and held for family members for many, many years.”
For David and his family, it was worth the effort to work through difficult issues regarding their camp. “Our camp holds so many memories,” says David. “We have been enjoying this place our whole lives.”
Tips for Setting Up a Successful Ownership Structure
When setting up a more formal legal structure for the ownership of your lakehouse, Peter Bertine has some suggestions based on his years of experience setting up trusts and LLCs for multiple families who own vacation homes together.
Each family situation is unique and with expert guidance your family can create a legal structure that fits just right. Take time to analyze your situation based on your family tree and future goals.
If it’s possible, a great way to avoid financial hardships with the family retreat is for the older generation to fund the trust with an endowment to cover the property’s maintenance costs. Members can still be asked to contribute financially, but in the event of financial hardship or major expense the endowment could be used to support the property.
Sit down with an expert, like an attorney, who knows and has experience with setting up family trusts and LLCs. It’s a good way to prevent strain on relationships and overcome barriers based on differing personalities and communication styles.
Younger generation members who have a desire to be involved in the management of the camp need to express their interest early on. The best way for them to approach older generations is to avoid criticizing decisions that have been made and instead, express what the camp means to them and how they want the camp to be part of their future.