Preserving Your Little Slice of Paradise: Estate Planning for Cabins

Spring has officially sprung and summer is just around the corner. With kids getting out of school and rays of sunshine beckoning us outdoors, our thoughts turn to vacations. One of the most popular vacation destinations is a cabin or other vacation home. Whether you own a cabin or are aspiring to cabin ownership there are a few questions you need to answer if your goal is to keep your beloved property in the family after you’re gone.

Who should own the property?

The most common answer is: my children equally. While a gift like this can be simply achieved through an outright gift in your will, a transfer of this nature may have some unintended consequences. First, if one or more of your children are not interested in cabin ownership they could force the sale of the property (through partition) and your goal of keeping the property in the family may meet a quick end. Second, one or more of your children could lack the means to pay their portion of the maintenance costs of the property (upkeep, property taxes, utility bills, etc.). Third, people or entities not named in your will may become owners of the property. For example, if a child gets a divorce, his or her share of the property may be partially or fully awarded to an ex-spouse. Additionally, if a child borrows against the property or a creditor obtains a judgement, a lien could be filed on that child’s portion of the property.

To avoid these problems, many cabin owners choose to transfer their vacation property into a trust or and LLC. If these documents are drafted correctly, ownership can be restricted to your children or other family members you choose.

How will the property be managed?

When a cabin has multiple owners disagreements can arise as to who can visit the property, who will perform maintenance on the property, and who can make changes to the property. For example, one owner might feel that visits should be limited to immediate family while another owner may want to extend invitations to friends and even accept renters to produce income from the property.

If the cabin is transferred to either a trust or an LLC, the documents can provide rules as to maintenance and use which can keep disagreements to a minimum. Of course, not all issues can be anticipated and addressed, however the trust or LLC documents can provide a method of decision making. In the case of a trust the trustee can typically make unilateral decisions as long as they are in the best interest of the beneficiaries. In the case of an LLC, the owners of membership interests can typically make such decisions by a majority vote.

How can the property be sold?

As mentioned previously, leaving the vacation property outright to multiple owners can leave the property open to a forced sale by one owner. If the property is transferred to an LLC, the ownership of interests can be limited to specific persons or a larger group (example: lineal descendants). Still, in some cases, if a majority of the owners decide to sell, the property could be sold to persons outside your intended group.  If the property is transferred to a trust, the trust document can again restrict ownership and can further determine who will own the property if certain persons are unable to claim their interest. Therefore, a trust can be a much more restrictive as to the power to sell the property. However, to follow trust regulations, the trust must provide for an event that will trigger the termination of the trust (example: the death of all beneficiaries). After this termination, the property could potentially be sold.

The tools discussed above can be used to control what will happen to your cabin or vacation home after you’re gone. To decide which tools are best to achieve your goals, you must consider the real life consequences of your plan and the effect such restrictions will have on your intended beneficiaries. Depending on the circumstance, such restrictions can be either a blessing or a curse. Talking to a qualified estate planning attorney can help you determine which tools are right for you.