Fred and Mary had deeded their cottage on Houghton Lake to their three children as a way to pass along the property when it became too expensive to maintain as they entered retirement. But use of a deed to convey the cottage and lakefront to three people and their heirs became a source of friction -- the exact opposite of the family unity that Fred and Mary had hoped to create. (Link prior blog here.)
Their children Charlie, Nancy and Paul were enthusiastic at first about receiving a valuable recreation property for no initial cost, but they began to bicker about who would use the cottage during the prime summer season, how costs were divvied up, and even the cleanliness of premises after visits.
The arguments became so pointed that Paul -- who lived out of state -- decided that he wanted to sell the property and give the proceeds to their parents. Under Michigan real estate law, any one of the three people named on the deed could force the sale of the entire property or, at a minimum, force the others to buy out his or her interest.
Fred and Mary’s estate planning attorney proposed an alternative that would allow the children to maintain ownership and family harmony: transfer the deed to a Limited Liability Company and issue shares to each of the three children.
Their attorney explained that an LLC was the smoothest path for many families in a similar situation because it provided much more flexibility and a logical method for dividing ownership and expenses among families. Joint ownership is not the best form of ownership for property owned by several people, particularly if they intend to also pass the property along to their own children, he explained.
Their attorney outlined some of the other benefits, such as :
Limiting liability. If there is a financial loss related to the property, there isn’t any personal liability for the owners. The financial loss would be limited to the value of the property.
Sale of shares rather than the entire property. Under the LLC, a shareholder can only sell the shares that he or she owns and cannot force a sale of the entire property.
Working out details of use and cost with an Operating Agreement. Through an OA, the three children could set up a calendar of the weeks for each family, costs associated with the cottage, how people were to be reimbursed, and expectations of cleanliess when a family leaves the premises for the next family.
Through discussions with the attorney, the three children decided that Charlie would get 50 percent of the shares since he used the cottage the most, did most of the work in maintaining the property and was married with four kids of his own. Nancy would get 35 percent of the shares because she lived in the area and used the property occasionally with her husband and two children. Paul would get 15 percent of the shares because he lived in Colorado and infrequently used the cottage with his wife.
Property taxes, costs of maintenance and other expenses were to be split by the percentage of share ownership, and a checking account was set up under the LLC so that all the shareholders could see all the deposits and payouts at any time.
The LLC also created a logical mechanism for transfer of ownership to heirs. It was generally understood that Charlie’s family most likely would buy the entire property at some point as his children were older and would reach adulthood the soonest with children of their own. The LLC made it possible for Charlie and his children to buy out the other shareholders at fair market value, based upon a sound financial basis since it was clear who paid the expenses over time.
The LLC was implemented by the estate planning attorney, and Fred and Mary’s children were all able to enjoy the cottage in a way they felt was fair.