The Legacy Cottage

Allocating Burdens And Benefits
One of the common aphorisms about trustees is that they bear the burdens of ownership so that beneficiaries might enjoy its benefits. The irrevocable trust/LLC structure we propose provides an ideal arrangement for allocating burdens and benefits of legacy cottages among the trustee and family members. A viable approach to trusteeship will usually include an institutional trustee (with experience in real estate management) and individual trustees representing branches of the family. The institutional trustee will be responsible for ensuring implementation of the grantor’s intent and managing the endowment. The family co-trustees will be responsible for coordinating the management and use of the cottage through the LLC operating agreement.

Family members, working together through an operating agreement under the LLC, will be responsible for maintaining the property, developing a policy of access and usage, preparing an annual budget for the cottage’s annual operating expenses (subject to review and approval by the trustees), and ensuring that the cottage’s use sustains the family’s legacy and contributes to the well-being of family members. The operating agreement provides maximum flexibility for family members to participate in the cottage’s management to the extent they desire. Each family may determine, subject to the trustees’ oversight, appropriate structures, such as committees or a family council, for the cottage’s management. The grantor may choose to establish a governance structure within the operating agreement, while providing flexibility for future modification.

A vital element of a multigenerational plan for a legacy cottage will be an endowment, sufficient in size to provide for the property’s annual operating expenses (maintenance, utilities, insurance, taxes and assessments) as well as periodic improvements and modifications to adapt the property as the family grows and its use changes. The management of endowed funds is a core competency of a trustee and is one of the compelling reasons why the legacy cottage will benefit from a professional trustee. One of the most common areas of conflict with legacy cottages is the allocation of the property’s expenses. Without an endowment, families struggle to develop an allocation plan that accommodates varying levels of use, and recognizes different contributions to the property’s maintenance and management. Covering the cottage’s expense through cash flow from an endowment largely extinguishes this area of conflict.

A family limited liability company is an ideal structure for ownership of a cottage by multiple family members, where maximum flexibility is desired and the plans for the cottage extend for one or perhaps two generations. Where a family desires that its treasured gathering place serve the family for two or more generations, a better structure will include an irrevocable trust with institutional and family trustees, a carefully crafted statement of intent, and an LLC to both hold title to the property and facilitate family participation in the ongoing maintenance and management of the cottage. Thoughtful trust design balancing unique intent and flexibility, and an operating agreement tailored to each family’s circumstances, will be vital to the effective use of this technique. 

R. Hugh Magill is chief fiduciary officer and global director of trust services and Raymond C. Odom is director of wealth transfer services at Northern Trust.