Family cabins spark many different emotions. For some, it is heaven on earth—a place where the family comes together and incredible memories are made. For others, it is a source of contention. They view it as an additional expense that requires more work than it is worth. It is a means of holding their inheritance hostage and forcing them to spend time with family members whom they would rather just see at Thanksgiving and Christmas.
Many parents want to pass the family cabin on to their children and grandchildren. They want their family to continue making wonderful memories for generations to come. But they need to make sure they consider all of the issues and potential conflicts that could arise from transferring the cabin. Many parents believe that their children will just “get along” and work together during any ordeal that may present itself, because who wouldn’t be happy to inherit a cabin? But what happens when a child is not financially able to pay expenses related to the cabin? What happens when a child wants their inheritance in cash rather than as an interest in a cabin? Will that child be forced to start a partition action because the siblings cannot agree on how to divide up the cabin? And what about scheduling time, divvying up expenses, determining who can use the cabin, and whether a child can mortgage the cabin for some much needed cash in a time of need? These are all issues that parents must consider when they are passing the cabin on to the next generation.
The form in which cabins are transferred to the next generation is very important, and the consequences of naming children as either tenants in common or as joint tenants are often overlooked (or unknown). There are several things to consider when transferring property outright. As a joint owner, a child can pass his or her interest in the cabin to a spouse or a third party without the consent of the other owners. If a child is unable or unwilling to meet the financial obligations of the cabin, the others are forced to take on this burden without the guarantee that they will be reimbursed for paying their sibling’s share of the expenses. A child’s interest in the cabin is subject to his creditors, and he can use his interest as collateral for a loan without the consent (or even knowledge) of his siblings. A child can also use the cabin for a disproportionate length of time, or can decide to rent out the cabin without first consulting the others.
There are two vehicles that are recommended for transferring ownership in the cabin that can address some of the issues described above. The first is to create a cabin trust. A cabin trust can appoint a trustee who has management control. It allows parents to designate who can use the property, when they can use the property, and how expenses related to maintenance, taxes, and repairs will be allocated. Another technique, and often times a better approach, is to create a limited liability company (LLC) to hold and manage the cabin. The parents (and the children in many circumstances) can create an Operating Agreement which outlines ownership, use, payment of expenses, and restrictions on use and improvements to the property. It can include buy-out provisions in the event a child no longer wishes to own an interest. Placing a cabin into an LLC prevents a forced sale or partition by one of the owners, it allows for simplified scheduling, it can restrict who can own an interest in the LLC (especially in the event of a child’s divorce), and it can address a child’s failure or refusal to pay his or her fair share.
It is important to consider all of the issues and potential conflicts that may arise when passing on the family cabin. If it is a parent’s desire to keep this sacred place in the family, without causing it to tear the family apart, they must do proper planning.