With the temperatures falling and daylight waning, it’s time to pull in the dock and shutter the cabin. For some families, it’s also a time of year to ponder a more dramatic change: What to do with the family cabin.
Sometimes, that means a sale. And other times, it means giving the property to a sibling or child.
Barbara Kristiansson, a Twin Cities estate planning attorney, says that long before such a transaction happens, families need to have serious discussions about the emotional and financial implications of such a decision.
Q: When it comes to passing down the family cabin, or selling one that’s jointly owned, what are the most important legal agreements or contracts to have in place?
A: There isn’t one magical document or type of plan. The most important factor is that cabin owners have a thoughtful succession and management plan that is tailored for the family’s situation and needs.
Q: What should people be thinking about if they’re buying a vacation property with siblings or other family members?
A: Whether you are purchasing a new property with family members (or friends), or are receiving an interest in the property from a deceased loved one, there are multiple elements that should be addressed in an agreement among the owners. At a minimum, an “owners’ agreement” should discuss ownership, when and how ownership interests may be transferred, allocation and payment of taxes, maintenance and other expenses among the owners and conflict resolution.
Q: Is it always necessary to establish a limited liability corporation?
A: LLCs, which provide a structure for decisionmaking and a means to ensure all of the involved members of the family understand their roles and responsibilities, are increasingly common, but that does not mean that an LLC is appropriate in all circumstances. The type of plan that one family has may not be the right type of plan for their neighbor.
Q: When does it make more sense to “gift” a cabin to a family member rather than sell it outright?
A: The reasons for gifting a cabin vary from personal reasons to tax planning. In some cases, a parent or relative wants to experience the joy of being able to see the next generation enjoy the property and build memories. However, gifting may have unintended consequences, and should never be done without considering all of the options and potential consequences.
Q: What are some of those unintended consequences?
A: One of the biggest challenges with any gift is giving up control. When you make a gift, you actually need to give up all control over the asset (or it isn’t a gift). That’s easy to understand when you give your nephew $10 for his birthday — he gets to spend it on whatever he chooses. But when it is something that you live in for a month in the summer, and you give it to your children, you can no longer control who can visit or your use. And if you want to use it exclusively, we will recommend that you pay your kids rent.
Q: When families co-own a second home, what’s the most common dispute?
A: The two biggest sources of conflict are about money and use of the cabin.
Money conflicts generally occur around the best way to share expenses. Should expenses be split according to ownership percentages or usage? A sibling who infrequently uses the cabin is unlikely to agree to share expenses equally. Other siblings may feel that frequency of use does not change the tax, maintenance and other expenses, and such costs should be shared equally among the owners. Decisions such as whether to update the kitchen, replace the roof or make other repairs or improvements are also common sources of disagreements.
The other issue that we often see is about the usage of the cabin. Whose family can have the cabin for the July 4th weekend? Should a 17-year-old nephew be allowed to use the cabin for a weekend with his friends? What about one of the owner’s longtime neighbors?
In our experience, maintaining expectations is critical. We will provide a list of areas where families disagree over ownership issues, and encourage them to discuss how they should be resolved before they ever arise. Based on this discussion, we draft an agreement that incorporates the owners’ wishes about the variety of issues that can be encountered.
Q: What’s the worst outcome you’ve witnessed in a situation where the relatives couldn’t come to agreement?
A: The breakdown of any family relationship over “stuff” is always heartbreaking. In many cases, the breakdown has been in the background for many years, and finally comes to the surface in the midst of grieving over the death of a parent. In the worst situations, there is no remedy. However, when parents have proper planning in place, the conflict can usually be controlled, and some families are able to heal.
Q: What’s the biggest financial mistake made when someone inherits a second home?
A: Trying to hold onto property that the beneficiaries cannot financially sustain. Families will often try to maintain the family cabin, even though it may not be in their financial best interest.
Q: What’s the most significant emotional pitfall?
A: For individuals who are in the process of transitioning the property to the next generation, the biggest emotional pitfall is failing to learn the next generation’s hopes and desires relative to the property and substituting their assumptions instead. Having frank and open conversations about the property is vital to this planning. For individuals receiving property from family members, it is allowing the emotional ties they have to the property to overcome their financial sensibilities.
Q: Are there any new rules/laws that affect second-home succession plans?
A: Yes, there are some new, important laws that affect non-Minnesota residents who own real estate in Minnesota. ... The first is that if you make a gift of Minnesota property and die within three years of the gift, the value of that gift is “pulled back” into your estate for estate tax purposes. This can have some negative tax consequences in that you basically pay both estate taxes and capital gains taxes. The other change is that Minnesota will now “look through” the LLC to see where the property is. So, under the old rules, a Florida resident with a Minnesota cabin could put that cabin into an LLC and it would be taxed to Florida, which has no estate tax. Under the new rules, Minnesota will now look through the LLC, see that it has Minnesota property and subject it to estate tax.
Jim Buchta • 612-673-7376