Your Guide to Avoiding the Family Cabin Nightmare
What comes to mind when you think about your vacation home?
Most people who have a family vacation home associate it with blissful and carefree days. Whether it’s fishing with grandpa, the smell of burgers and hot dogs on the grill, swimming in the lake with friends and cousins, or roasting marshmallows around the fire pit, the cabin can be a place of summertime fun and meaningful connection. Who wouldn’t want the same for their children’s families?
However, many families don’t give enough thought to what the “cabin plan” will look like beyond the original owners. In fact, all too often there is no “cabin plan” at all! First-generation owners simply assume that the kids would love to co-own the cabin after they pass away and resist taking on anything beyond a simple Will.
Why a simple “cabin plan” isn’t always best
That approach can lead to unintentional results. For example, let’s say Mom Addison and Dad Jeff own a small vacation home in Minnesota. The parents’ intension is to keep the cabin “in the family” in perpetuity, and so their only son Chris inherits the cabin through direct deed transfer upon their death. Unfortunately, direct ownership transfer doesn’t protect Chris when he goes through a contentious divorce three years later, losing the cabin to his ex-wife in a protracted court battle. The cabin didn’t stay in the family, despite Addison’s and Jeff’s wishes.
Or let’s take another family as an example. Dad Scott, Mom Carol, and their two adult kids have many fond memories of spending vacations and holidays at the cabin, playing in the stream at the far end of the property and exploring the nearby woods. Scott and Carol pass the cabin directly to son John and daughter Mary, intending for the two of them to co-own it equally.
The parents may have wanted to be fair, but two years down the line there’s tension between the siblings. John, an owner of a booming local car dealership, lives a mere 60 miles away from the cabin. He uses it several times a month with his young kids and has invested a considerable amount in maintenance and upkeep. Mary, a middle school teacher who is also a single mom to a special needs child, lives in another state and cannot travel to the cabin often. The best she can do is one week-long stay per year, and her financial situation doesn’t allow her to contribute anything to the upkeep of the cabin. Frankly, Mary would have preferred to take her share of the cabin ownership in cash and use that money to cover her son’s medical expenses – but her parents’ wishes have left no blueprint for that. Turns out that keeping the cabin in the family “no matter what” wasn’t the best course of action, after all.
How can a family avoid turning a vacation home into a source of frustration and arguments?
Start with a frank conversation
In order for the cabin to remain a source of joy and fond reunions, the ownership structure must work for everyone involved. So, the best place to begin is to understand what that optimal arrangement might look like. Set aside a special time for this conversation – in other words, don’t try to squeeze it between opening presents and cutting the birthday cake for one of the grandkids. The discussion about the future of the cabin deserves its own place and time.
It’s a good idea to give your adult children fair warning that you want to talk about your plans for the cabin. Depending on family dynamics, your kids may want to include their spouses (or leave them out and keep this as a “blood family only” matter).
Open the meeting by inviting your kids to share their vision for the cabin. Here are some conversation starters to consider.
How do they feel about the family vacation home?
How important is it to them to retain ownership and use of the cabin?
What arrangement might be comfortable and convenient for them?
How frequently would they want to visit?
How many families can the cabin accommodate comfortably?
Where do the siblings live, and what would be most practical and fair for designating the person in charge of making decisions and handling maintenance? What about administrative matters, such as paying utility bills and property taxes?
How do they feel about the possibility of renting the cabin when it isn’t being used by the family?
Remember that your task during this meeting is to open the conversation and listen. It’s common to assume that the kids will want to keep the cabin, when in fact some of them may not want it. Do your best to manage your emotions, even if you do experience some disappointment. This reluctance may have nothing to do with you but be driven by the logistics of where they live, the flexibility of their work, their financial circumstances, etc.
After you’ve taken the time to get everyone’s thoughts about the future of the cabin, reflect on your own intentions. Should siblings who don’t use the cabin (or whose financial circumstances have become challenging) be able to sell or transition their ownership interest to co-owners, or should everyone own the cabin equally no matter what? Are you in a position to establish a cabin expense fund for paying taxes, insurance, and maintenance expenses? If so, how many years will that fund last, and what should happen after your initial funding runs out?
Now that you are clear on your kids’ wishes and your own vision, you are ready to consider your options.
Option 1: Direct ownership transfer via deed
Direct ownership transfer is the most common and the simplest way to transition cabin ownership from one generation to the next. The transfer is usually done via a deed. The original owners can structure the transfer as a joint tenancy with survivorship rights, which allows two or more people to co-own the property with equal ownership stakes and to pass that ownership on to surviving owners on their death. Alternatively, a tenancy in common can be created to allow two (or more) people to co-own the property and sell their ownership rights.
The downside of direct ownership transfer is that it doesn’t offer protection from creditors or ex-spouses, as illustrated by our example of John who lost the family cabin to his ex-wife. And, unless the parents specifically structure the transfer as a tenancy in common, this arrangement can leave the less financially stable siblings on the hook for maintenance expenses and property taxes they can’t afford – without a good way to get out of the costly cabin ownership.
Option 2: Put the cabin in a trust
Creating a revocable or an irrevocable trust allows the original owners to designate a trustee who will manage the property and make decisions.
A trust agreement that governs the arrangement is intended to spell out every detail and leave no room for misunderstanding and ambiguity. Some families choose to establish a fund linked to the trust, which can be used to cover related maintenance expenses, taxes, insurance, repairs, etc. Rules for cabin use and financial contributions (if needed) can be included in the trust agreement, as well. Clarity and attention to detail involved in creating a property trust are among the unquestionable advantages of this approach.
On the flip side, a trust can be rather be rigid once established. It doesn’t allow much flexibility for someone’s circumstances to change (which could be difficult if one of the siblings were to lose a job and have a tough time making financial contributions required by the trust agreement). A trust can also become cumbersome if you decide to rent the cabin and hire a property management company.
Option 3: Create an LLC
An LLC is a business entity that’s created to own and manage the cabin. An LLC is typically governed by an operating agreement. Similar to the trust agreement, this document can define rules for use and financial contributions. However, it has the added benefit of flexibility because it can be amended as circumstances change. The agreement can include a blueprint for transferring ownership interest, which could be useful if your children’s plans and life situations change. An LLC arrangement can limit personal liability, offer creditor protection, and keep the cabin out of divorce disputes.
Among the downsides of using an LLC to own and manage the cabin is the requirement to file registration and other official forms with the state. LLCs can also be expensive to establish and maintain, so be sure to get a good understanding of all the costs involved.
Avoid the family cabin nightmare!
When it comes to defining the plan for the family vacation home, there is no one-size-fits-all recommendation. The key is to create a plan that’s right for you and your family. Begin by connecting with family members to talk about their vision for the cabin. Consider your own intentions and financial reserves, then talk with a financial planner and an attorney to fully understand the pros and the cons of your options. Finally, no matter which form of ownership transfer you choose, there are income, estate, and gift tax implications to consider. If you are wondering about the best way to ensure that your cabin continues to be a source of joyful and care-free memories, call our team at Phillip James Financial.