What To Do About the Family Cottage

What To Do About the Family Cottage

For Michiganders, some of their fondest memories are times spent “up north” at the family cottage. Beyond their enjoyment of a cottage, many cottage owners are just as concerned with making sure future generations are able to have the same experiences. While this is a laudable goal, it is often unattainable without planning. Fortunately, vacation home owners have many planning opportunities to ensure the cottage can affordably stay in the family and be used fairly by all.

There are many issues to consider when planning to transfer ownership of the cottage. One of the most notorious is property taxes. Following several important legal cases and a new statute, owners of residential property in Michigan can now pass their property on to the next generation without a rise or “uncapping” of their property taxes–provided they follow the necessary steps. That, however, is not the only consideration to make when determining how to transfer the property. The tax basis [bracket? status?] of the new owner(s) is also important. Given the high property values often associated with cottages, the method of transfer could create a tremendous tax obligation for the new owners.

And while finances are often the highest hurdles, it is important to address governance of the property, as well. Because we rarely put cottages into LLCs (an LLC is typically now used when liability concerns are greater than tax concerns), it is important to have a Joint Tenancy Agreement. This agreement operates much like a cottage LLC. It determines how and when the property is used, how expenses are paid, how the property is passed on to the next generation, etc. While these are only a few of the issues to consider with a family cottage, they should illustrate the scope of planning opportunities that can allow a property owner to successfully transition his or her cottage to the next generation.


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