Passing Down the Family Cottage- Can you Afford It?

Passing Down the Family Cottage | Can You Afford It?

By: Robert W. Parker, Attorney

Robert is a seasoned attorney with over 30 years of experience representing landowners, developers, business owners, lenders, municipalities, and individuals throughout Michigan.


How to handle the disposition of the family cottage upon mom and dad’s death has become a cottage industry.   Parents discover that, while their children may have expressed an interest in keeping the cottage in the family after their parents’ deaths, not all of the children have the same level of interest.   Some live far away and thus aren’t able to use the property as often as their siblings and still other children may not have the financial ability to shoulder their share of expenses.

Unless carefully planned, the outright gift of the family cottage to the children can, unintentionally, create strife and discord amongst family, especially when mom and dad aren’t around to referee.

Swirl into this issue the possible “uncapping” of the property’s taxable value when it is transferred to the next generation. The “uncapping” of the property’s taxable value poses a challenge due to the fact that if the property taxes suddenly increase, the family may discover that they aren’t able to afford the taxes, let alone the cost of maintenance.

The process of passing down the family cottage, which seems fairly straight forward at first, can become quite complicated, very quickly.  

We have found that this process can be easily facilitated and many problems avoided if the parents leave a blue print as to how the family cottage should be owned, transferred and how future decisions should be made through the creation of cottage trusts or cottage limited liability companies. 

The issues to consider when creating a cottage trust or cottage limited liability company are:

• Do the parents have exclusive rights to possession while alive?
• Upon mom and dad’s death does each child need to contribute equally to the cost of maintenance, insurance and taxes?  Or should each child’s contribution be a product of their usage?
• What if a child doesn’t pay their share of expenses?  What mechanism is there for collection?   
• Should there be “rules” regarding usage?  Pets?  Guests?   Do parents need to be present when young adults use the property?
• Is a child’s interest in the property considered an asset for purposes of divorce or bankruptcy?
• What happens to a child’s share of the cottage when he or she dies?  Does it go to whom they designate, i.e. their spouse or children?  Or does their share go to their siblings?
• How do we avoid the uncapping of the property’s taxable value upon the death of mom and dad?  What about when a child dies?
• What if a child wants or needs to sell their share?  How is that accomplished?

As demonstrated above, each case poses issues specific to your family’s current circumstances, and plans that work for one family may not be appropriate for your family. Attorneys can assist in guiding you through the various options available and choose the plan that works best for you and your family.

© 2014 Smith Haughey Rice & Roegge

Smith Haughey Rice & Roegge
101 N. Park St.
Ste. 100
Traverse City, MI 49684
231.929.4878

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