As summer approaches for many of us our thoughts turn to the cabin or some other vacation property. For many families the cabin is not only a weekend or summer getaway, but part of the family’s legacy. For many owners, passing the property on to the next generation is not a simple task. The cabin is not an income earner (unless it’s rented) and requires constant maintenance, sometimes more than a primary residence. I can remember our family’s cabin. There was something to do every weekend and larger projects were saved for the summer months. These properties require specific financial and estate planning to avoid family disharmony and unnecessary costs of estate tax and administration.
Here are seven important considerations if you already own or are thinking about purchasing a cabin or other vacation property:
- The ownership of the cabin. Many cabins are, or should be, owned in LLCs (limited liability companies) or trusts. Ownership interests are often passed to children or grandchildren over a series of years using gifts. From a gift tax standpoint, case law suggests that the gift of a partial interest in a cabin is not eligible for the annual gift tax exclusion ($14,000 for 2015) so the gift will cut into the family’s lifetime estate and gift tax exemption ($5,430,000 for 2015). For many families, that will make little difference since they will incur no gift or estate tax unless their combined estate (for husband and wife) exceeds $10,860,000. However, Minnesota has an estate tax on assets gifted at death with a much lower exemption ($1,400,000 for 2015). Careful planning can reduce or eliminate the tax on the cabin altogether.
- The cost of ownership. Who pays the costs of ownership? Once the gift is made to children they may often not be in a position to contribute to the annual costs. Many families realize that grown children, often living in distant states, have little interest in contributing to payment of the real estate tax, insurance, utilities, maintenance and sometimes a mortgage, especially if they seldom have the opportunity to use the property.
- Use of the Cabin. How is use of the cabin determined? Will use be reserved to those who cover the cost? This is one area where effective governance becomes vital.
- Ongoing governance of the LLC or Trust. Agreed upon arrangements for governance provides an organized means of decision making. This can include scheduling, maintenance and repairs, expansion, and even possible sale.
- Personal liability protection. Activities at a cabin can often involve serious liability issues. Use of boats and other recreational equipment and the use of alcohol and drugs can present serious risks for children as well as adults. Careful planning of ownership, using a liability limiting entity and liability insurance planning are vital.
- Resolving disputes. Provisions for dispute resolution are vital to maintain family harmony. This may include provisions for mediation.
- Planning for succession as the family grows. As families grow so do issues regarding use and covering costs. Will the cabin continue to pass to successive generations including grandchildren and great grandchildren? How will this work and who will continue carrying the costs?
When it comes to planning for a cabin, make sure you consult with a qualified attorney. Feel free to contact me regarding any questions involving the purchase or planning of a cabin or other vacation property, and for any other issues regarding your estate plan or other legal issues.