10 Advantages of Family Cottage LLCs
Michael’s parents own a cottage on Lake Ontario in Wilson, New York which has great sentimental value to him. He has fond memories of summers on the lake as a child. He wants to keep it in the family for his children, his brothers and future generations to enjoy.
Since his parents are in their 90s, he is worried that he will have to sell the cottage when they die. Michael is thinking about forming a New York Limited Liability Company (LLC) for the cottage.
LLCs are becoming the most preferred entity for vacation homes because it is an easily transferable form of ownership with an operating agreement governing the use of the property.
Joint ownership, such as tenancy in common and joint tenancy with rights of survivorship, is not the best way to own family vacation homes.
As the ownership interest becomes fractionalized passing down to future generations, a family member could force the sale of the cottage through a partition lawsuit.
One of his brothers may not have good experiences at the cottage; lives too far away to be able to use it; prefers a cash inheritance to the cottage; or cannot afford his share of the expenses. An ex-wife of one of his brothers may try to force a sale out of spite.
Joint ownership may lead to family fights over how the vacation home is operated, maintained, and improved.
How will operating and repair expenses be shared? What if a brother is late with his share of the taxes or insurance? Who gets prime season use? Can a brother rent his weeks to a third party ?
The ten (10) advantages of a vacation home LLCs are:
- Personal liability protection from lawsuits by creditors and users ;
- Prevents owners from using their right of partition to force a sale of the property;
- Promotes shared governance and use of the property through an operating agreement tailored to the unique goals of the family;
- Prevents transfer of an interest outside of the family;
- Enables owners to transfer their ownership interests to their children and descendants more easily and utilize the annual gift tax exclusion ;
- Helps settle or prevents disputes about who can stay at the cottage and who is responsible for expenses;
- Value is discounted for estate tax purposes (which may be reduced or eliminated by proposed IRS regulations);
- There is no need for ancillary probate if the cottage is located in another state;
- A spouse cannot force a sale of the cottage in the event of divorce; and
- Perpetual existence: interests can be passed on the death of a member without the necessity of filing a deed.
My next blog will explain the eleven steps necessary to form a New York vacation home LLC.