Handing Down Your Family Cabin: Trust vs. LLC

As you toss that Frisbee outside your beach house, are you struck with hope that your grandkids will have similar good times there? It’s time to start planning. If you fail to take the right steps to ensure your vacation home’s future ownership — through your estate plan — you may be opening up a Pandora’s box of painful family disagreements.

How to be sure you’re making the best decisions for your family? First, ask yourself if all your kids want the house. While your vacation home holds strong sentimental value that you want to preserve, maybe some of your family members don’t want to own it. Consider these two points:

For heirs, thoughts about how far they have to travel to visit the home and whether their income can support upkeep, taxes and other costs may be looming large.
A biggie: If the home makes up the bulk of their inheritance, maybe they’d prefer or require a more liquid asset.
Assuming your heirs want the cabin, you can leave it outright in your will to the children or family members you wish to inherit it. Your estate transfers the deed to each person you cite to own an equal portion. But what seems simple to you may lead to complexities for your heirs, as well as disagreements and resentment.

The trust solution

You can address many inheritance solutions by leaving the vacation home in a trust:

  • You select a trustee to be in charge of decisions concerning the home.
  • Heirs become beneficiaries of the trust with the right to receive rent if the home is rented or to be able to use the home, according to terms you specify.
  • The trustee makes the ultimate decisions concerning the property and is empowered to referee any disputes, bringing them to a civil conclusion.
  • You will incur costs setting up the trusts, plus the trustee may be entitled to an annual compensation.
  • The trust can leave extra money to cover operating costs. Add up how much it may cost to operate the vacation home for a year and include things like real estate taxes, insurance and utility bills.

The LLC Solution

  • Liability protection. The liability of an LLC, assuming all formalities are followed, is limited to the assets of the company.
  • Tranfer of Membership Interest. A LLC allows the the owners of a family cabin to transfer fractional shares of the vacation property to children during life. This can help the older generation see how their kids will handle being “in charge” and working together. Also, the buy/sell provisions within the operating agreement will give instructions as to how ownership interests pass in the event of a disability, death, bankruptcy, or divorce.
  • Management. The duration of a LLC an be indefinate and management is dictated by the operating agreemet of the company. This allows for management of the vacation property to change as the family changes for years to come.

Making use of life insurance

As you plan your estate and set up any necessary trusts, note that life insurance funds buyouts of a departing owner. A policy can fund the purchase of ownership interests — some life insurance policies let you borrow from your policy. You can then use the cash to buy out the others’ shares.

Using a cash policy loan from life insurance is a great option, as it can provide needed liquidity when one shareowner wants out, letting you fund payments to the other owners. The income buildup on the accumulation in the account is tax-deferred.

The key thing to realize is that owning a family cabin is great, and planning to pass it on to your family shows your desire to see that generations to come have the opportunity to enjoy it. Take steps to assess whether it’s the right thing for all your heirs to inherit, ensuring that it’s cared for over the years. It’s advisable to meet with an attorney to make that a reality. The attorneys at Rochford & Langins, LLC have extensive experience helping families pass vacation properties to the next generation. Call us today to set up an appointment!

By |2018-12-14T13:46:00+00:00December 13th, 2018|Probate and Trust Administration|