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Owning and Managing the Family Cottage

October 1, 2010

The family cottage: the image conjures thoughts of relaxing under a shady stand of oaks, splashing in the lake, and the distinct smell of a campfire. A cottage is often an individual’s most important asset, if not from a financial standpoint, then certainly from an emotional one. Deciding how future generations will benefit from the family cottage is often difficult. Yet, appropriate planning will allow a family to enjoy the cottage for generations. This article is not a comprehensive treatise on the matter; rather, it addresses several key issues any cottage owner should consider.

Common Concerns

Many cottage owners do not give sufficient thought to issues that can cause serious threats to maintaining the cottage through the generations. Real estate and estate taxes should be part of any planning discussion, but often are ignored (income taxes should also be considered, but are not the focus of this article). Even “simpler” considerations, such as how the next generation will share the cottage, are frequently unexplored.

Real estate taxes: In general, real estate is re-assessed (“uncapped”) with every transfer of property. However, Michigan law provides for certain exceptions to the uncapping rules which should always be considered when planning for the future of a cottage.

Estate taxes: In 2009, the first $3,500,000 of each person’s estate is exempt from estate tax; any excess is subject to a 45% tax (although married couples typically can defer this tax until the survivor’s death). In return, the income tax cost basis of the property is “stepped-up” (all accumulated gain is eliminated).

The Next Generation: Parents often assume that their children will get along after the parents’ death. Yet, even amicable family situations can be strained when a cottage is left equally to multiple children who have varying abilities to use, maintain and/or pay for the cottage. The threat of partition – likely resulting in the forced sale of the cottage – looms should disputes over such issues arise. Proper advance planning can address these concerns in ways that are beneficial to everyone.

Potential Solutions

There are many techniques available to address cottage planning. The most common “plan” is probably the lack of a plan altogether; this can lead to problems which could have otherwise been avoided. Some common solutions include:

Joint Ownership Agreements: Michigan law exempts certain transfers of jointly held property from uncapping. Adding individuals to the cottage title should not result in uncapping and may be part of a broader plan to transfer ownership to a younger generation. Yet, this can result in unintended gifting consequences and concerns regarding control. In this situation, the use of a joint ownership agreement to set forth rules regarding the ownership and use of the cottage is strongly advised.

Qualified Personal Residence Trust (“QPRT”): If estate taxes are a primary concern, a QPRT can be effective. A QPRT holds title to real property for a specified period, during which the grantor retains the exclusive right to use the property. When the term expires, the property passes to others (e.g., the grantor’s descendants). The donor is not treated as having made a gift of her retained interest, so the gift tax value of the property is less than the actual fair market value of the entire property. However, the property taxes will be uncapped upon termination of the QPRT.

Annual Exclusion Gifts Using an LLC: Another common technique to reduce estate taxes is to make “annual exclusion” gifts. Currently, individuals may give up to $13,000 annually (or $26,000 for a couple) to as many people as they like without federal transfer tax consequences. However, recording deeds each year can be cumbersome. An alternative is to create an LLC to own the property. The owner(s) can assign membership interests in the LLC each year (although the property will be uncapped when there has been a change in ownership of more than 50% of the beneficial interests). Importantly, however, the LLC allows the cottage owner to manage the property, even while gifting membership interests to other individuals.

Current federal law permits the application of valuation discounts to minority interests in LLC’s, allowing a donor to give membership interests worth more than the stated gift tax value. Congress may act in the near future to eliminate these discounts, so the donor should be conscious of the law in effect when any gifts are made.

Cottage Ownership By Trust or LLC: The most difficult decisions in cottage planning often involve succession of ownership. Decisions often have to be made to facilitate shared use of the cottage. Ownership as “tenants-in-common” – with each child owning a fractional interest – may be simple, but often causes problems, especially as the number of owners increases.

Ownership of the cottage by a trust or an LLC is often the best choice. In either case, the underlying agreement includes rules regarding use of property, how expenses are paid, and what happens when a beneficial owner dies. Determining which planning vehicle is more appropriate depends on the circumstances and the owner’s intent. The owner and her advisors should consider the following objectives and their relative importance – the answers will suggest the appropriate ownership entity:

  • Avoiding estate and gift taxes for multiple generations.
  • The desire to dictate rules and management of the property (versus allowing future generations more flexibility in changing the rules or management structure).
  • Gifting of cottage interests.
  • Use of the cottage by others, whether informally or by renters.
  • Creditor protection.


Planning for cottage ownership and succession should not be taken lightly. Without adequate planning, various taxes and family disagreements can destroy the future enjoyment of the cottage. Unfortunately, there is no “cookie-cutter” formula to such planning. A family’s goals and personal relationships will influence the ultimate decisions. With careful thought and consideration, a family can create a plan to ensure generations of family memories at that family’s most important asset – the family cottage.

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