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Fun in the sun: Transferring a lake cabin to the next generation

The summer months in North Dakota are a treasure. Long days and typically moderate summer temperatures are ideal for enjoying lake life. Family members and friends gather to spend time together and time on the water. All these wonderful memories have many lake cabin owners seeking ways to keep the cabin in the family so the same rituals and traditions can carry on after they are gone. This article will give cabin owners preliminary questions to consider when thinking about the future, as well as illustrations of planning ideas that have worked well for other families.

First, it pays to be realistic about the cabin ownership after you are gone. It may be difficult to exactly replicate the management of the property and family harmony that exists now. Ask yourself:

Do you have children or other family members who will actually use the property after your passing? It is worth asking your loved ones this question. Someone might be more enthusiastic or apathetic than you originally thought. Consider talking to everyone individually first, so they feel free to speak their mind, and then hold a family meeting for all to discuss ideas together.

Will your spouse continue to use the property after you are gone? She might find the maintenance to be a burden. If so, your surviving spouse may want to pass the cabin down to the next generation during her lifetime and let them take care of the upkeep. Be realistic about the time and cost required to maintain the property.

Can the people you want to leave the property to afford to maintain it? Property taxes, insurance, utilities and a maintenance fund for improvements will have to be paid by someone. Again, be realistic about the time and cost required to maintain the property as lake cabins are generally not income-producing properties that pay for themselves.

How do you currently own the cabin? Jointly with your spouse? As tenants in common with siblings? Is the cabin located on leased land (as is common on parts of Lake Sakakawea) or on land you own? Is the cabin considered real property? Or is it a mobile home with a separate DMV title? Is there a mortgage on the property? Gather all relevant documents so you are ready to answer these questions with your attorney.

After considering these questions, you can find a balance between stating specific directives for the cabin and leaving enough flexibility in your planning to accommodate changes in circumstances and priorities in the future.

When deciding what to do with the cabin after you are gone it can be tempting to skimp on legal formalities and rely on the presumed good intentions of someone in the future. Example: “I’ll leave the cabin to my son, and he knows if he sells it in the future, he needs to split the money with his three sisters. I trust him. And everyone gets along. I don’t foresee any problems.” That sounds nice, but what happens when the son dies and his wife sells the cabin and keeps the money? Or when he is diagnosed with cancer and is forced to sell it and use the funds to pay for his care? In both these scenarios your wishes were not fulfilled, yet nothing legally improper happened. If you had created a trust, LLC, or partnership, you could have ensured your other children received funds when the property was eventually sold.

If there is only one “heir apparent” to the cabin, you can direct the cabin to that child’s share of inheritance. If daughter receives the lake cabin, valued at $350,000 at the time of your death, then you can direct son’s share to receive $350,000 of other assets to equal out the distribution (and they will split everything equally after that).

But what if the cabin is worth $750,000, and you have five children, only one of whom lives in the area and would use the cabin? Avoid letting the sentimental benefits of the cabin cloud your judgment and remember that ultimately a lake cabin is an appreciating real estate asset. If you leave the cabin to only one child, you may not have $3 million of other assets in order to give each of the other four children their $750,000 share to make it equal. You could instead allow the local child to receive a portion of the cabin ownership to “fill up” her one-fifth share of the inheritance with the stipulation that she must buy out the remaining value of the cabin, with the proceeds distributed among the children. This ultimately keeps the cabin in the family while treating all the children fairly.

If you have multiple children who will use the cabin after your passing, you may wish to set up an LLC and gift ownership of the LLC to the children (either during your lifetime or upon your passing). The LLC Operating Agreement should contain buy/sell provisions so if a child wants to sell their share the other owners have the first right to purchase it. The buy/sell can also be triggered if someone gets divorced, dies, or files for bankruptcy. Utilizing a buy/sell agreement is a key advantage to using an LLC or partnership versus simply co-owning the property as individuals.

If you are worried about who will pay to maintain the cabin, you could set up a trust to own the cabin and give a sum of cash to the trust upon your passing to fund annual expenses.

Keep in mind the possibility that you or a future cabin owner may need to pay for long-term care in your later years. Discuss this risk with your attorney to see if a life estate deed or irrevocable trust may help protect the property from being sold if an owner is in the nursing home and has run out of funds to pay.

Expect different and sometimes competing priorities to surface — keeping the property in the bloodline, treating all family members fairly, and protecting the property from the nursing home, to name a few. Each situation is unique, and your ultimate decision on how to transfer the cabin will fall somewhere along a spectrum which begins at stating nothing specific and letting your family decide after you are gone, all the way up to creating a detailed trust or LLC governing the ownership for generations to follow.

There are many paths to ensuring your family will continue to enjoy long days and cool nights at the cabin after you are gone. You can smooth the way for future generations by working with an experienced estate planning attorney now to find the right path for your family.

This article does not constitute legal advice. Each individual should consult his or her own attorney.

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