In the fall 2016 issue of Private Wealth (“The Cottage Succession Plan,”) we discussed the use of a limited liability company (LLC) for transferring ownership of, and managing, the family cottage for the use and enjoyment of next generation family members. This structure has significant advantages over a tenancy in common arrangement by limiting alienation and partition rights, and reducing the risk of creditor claims inherent in tenancy in common ownership. An LLC structure also provides flexibility for addressing issues common to these types of properties: shared usage, expense allocation maintenance, and the redemption/liquidation rights of individual family members.
For some families, however, a cottage’s unique role in family legacy is so important that the current generation may wish to provide for its sustained use by multiple, future generations. This type of legacy cottage is not viewed as part of the financial inheritance of descendants because it has exponentially more intrinsic, rather than financial, value. For such a family, while the legacy cottage is categorized as part of the family’s financial capital on their balance sheet, its role in sustaining and strengthening a family’s human and social capital outweighs its pecuniary value as an inheritable asset. This type of property requires more than a simple LLC.
The Irrevocable, Multigenerational Trust
A viable plan for such a legacy cottage would still involve an LLC to hold title to the property and provide an operating agreement for the regular maintenance and management of the cottage. But the LLC’s sole member would be an irrevocable, multigenerational trust. Such a trust would describe the cottage’s distinctive legacy role for the family through a carefully drafted statement of intent. The unique characteristic of this memorialized intent is that it clearly describes the purpose behind ownership while taking into account the cottage’s recreational benefits. These benefits, however, do not come without costs.
In a one-generation cottage LLC, the operating agreement typically provides for the family members to share expenses with a very minimal, if any, cash endowment. For a legacy cottage trust, an endowment managed by the trustee would provide cash flow for the maintenance, management and periodic improvement of the property. Ideally, the trust would be exempt from the generation-skipping transfer (GST) tax to guard against diminution from future transfer taxes, and it would not be subject to the rule against perpetuities.