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As we enjoy our wonderful Northern Michigan summer, you may have noticed that some of your clients are
concerned about perpetuating family ownership of vacation property. Family affinity and emotional attachment
for lakefront and woodland properties is strong, and there is a definite interest in determining how to retain a
joint family interest and operation of a vacation property for the benefit of the future generations even though
they may become scattered around the country and/or the world.
The division and perpetuation of ownership of property in Northern Michigan gets complicated by both family
and financial considerations. Often the value of the property is a significant part of the estate of the senior
generation. While children living in Michigan are in a position to enjoy property in our area more frequently,
those residing a long distance away may wish to maintain their ties and ability to come back to Michigan for
the enjoyment of our four season recreation opportunities.
Some of the considerations that have to be taken into account in discussing this matter with your clients and
advising them would be:
1. Michigan Property Taxes. Is the property currently classified as homestead property for a member of the
senior generation? If so, how long is that status likely to continue, either from a standpoint of longevity or
possible desire to move? Because of the large economic impact of the homestead property tax classification,
this one factor alone may dictate what provisions are made for continued ownership and management.
2. Family Agreement. Is there agreement among the members of the next generation that the property should
be preserved for succeeding generations? That is, should enjoyment of the property as a recreational and
unifying facility be paramount over the financial considerations? Putting it another way, are members of the
family more or less agreed that they are willing to forego immediate economic advantage for perpetuation of a
family rendevous?
3. Endowment. How are the expenses of maintenance, taxes, insurance and repairs to be borne by
succeeding generations? Usually, the senior generation has paid all of these items with the expectation that
the children and grandchildren will enjoy the property at no out of pocket cost. However, when the senior
generation is gone, reality sinks in, to say nothing of increased property taxes that are likely to occur.
4. Joint Ownership. It becomes glaringly apparent that joint ownership among several siblings is not an
efficient, peaceful way to expect that continuity of ownership and enjoyment will occur. In fact, it is most
common that siblings will not be able to agree because of influence of spouses and offspring. Experience
has shown that the senior generation needs to plan ahead, with consultation from children, and should not
simply rely on leaving property to children as tenants in common.
5. Financial Considerations. I already mentioned the desirability of having some sort of endowment to go with
the property to pay expenses for a generation or two. The next question becomes how much should be set
aside and who will contribute the funds.
6. Form of Ownership. Should the property be held in Trust or an LLC, for example? Should this be
established at death or during the lifetime(s) of the senior generation? Family plans, composition, and the
Michigan property tax considerations may drive this decision.
7. Conservation Easement. If there is a significant amount of property involved, are there tax advantages to the
family in establishing a conservation easement, either before or after death, to preserve a part of the property
as vacant land, without development potential? Estate tax benefits of conservation easements are a separate
subject, but may be something to consider if there is a large parcel of land involved. This will not be a
consideration, for example, with a 100 foot lakefront lot.
8. Assessments. Assuming that there is no endowment or that the endowment has been exhausted, a
procedure for making assessments of beneficial owners should be established along with establishing
penalties and/or forfeitures for failing to pay assessments. That is, property costs money to maintain and
enjoyment should be contingent upon meeting necessary expenses.
9. Management. These discussions lead to the question of how the Trust, LLC, Partnership, or other entity is
to be governed, how decisions are made, how ownership interest is divided and what voting rights and
privileges there are.
10. Other Tax Considerations. In addition to conservation easement qualifications mentioned above, there
are estate, gift and income tax considerations to be taken into account in the planning process. In addition,
the writer has come upon generation skipping tax considerations as the desire for perpetuation of family
ownership and interest appears. Obviously, the planning for continuity of family property, in succeeding
generations, can be an important component of an overall estate plan and can’t be worked out in isolation of
the other planning elements.
Conclusion. Experience has shown that it is better to talk about these matters ahead of time, try to think out
the various considerations, some of which are outlined in this newsletter, and put the plan into effect during
the lifetime of the senior generation. If there is a genuine family desire to perpetuate family involvement in a
Northern Michigan residence, it should be discussed with children and grandchildren before consulting
professional advisors. The worst thing that can happen is assuming "the kids will work it out" will suffice.
There is no more certain way to foment disagreement and controversy than to avoid these important
questions on the assumption that the succeeding generation or generations will be able to agree. Often
times the value of the property is simply too large, particularly in relation to other assets, and the temptation to
convert the property to cash is overwhelming.
There is no form book solution that will satisfy the needs and desires of every family, and especially one that
will satisfy the needs and desires of every member of a particular family. It may be, in some cases, that it is
unrealistic to think that, despite good hopes and intentions, the property will be able to stay in the family and
be maintained for the enjoyment and benefit of all. If that is the case, it is usually better to provide for that up
front and permit any child with a particular interest to acquire the property at death, as part of his or her share,
and at a prearranged valuation.
We will be happy to share our experience with any of your clients upon request and hope that as a
professional advisor you can stimulate discussion and action among your clients who want to provide
continuity for the ownership and enjoyment of their Northern Michigan properties.
©BRANDT, FISHER, ALWARD & ROY, P.C.
This newsletter is provided for informational purposes and should not be acted upon without professional
advice.
| WEALTH CONSERVATION: PROFESSIONAL ALERT Brandt, Fisher, Alward & Roy, P.C. |
| August 2000 WHITHER THE FAMILY COTTAGE? by James R. Modrall III, J.D., C.P.A. |
| If you would like to receive future editions of the monthly Wealth Conservation Newsletter directly to your e-mail account, please e-mail our office using the following link: Estate Planning Newsletter |
| Brandt, Fisher, Alward & Roy, P.C. Attorneys at Law |