Passing Down the Family Cottage

1. Passing Downthe Family Cottage Presented By: John R. Blakeslee, Stephen C. Chambers, Kevin M. Huss & Robert W. Parker, Attorneys

2. Assess Situation • Do the current owners intend for the cottage to be passed to the next generation? • Are members of the next generation interested in taking over the cottage? • What is the cost to maintain the cottage on an annual basis?

3. Common Goals • Pass down cottage to future generation(s) • Minimize tax consequences • Provide clear requirements for contributions and permitted uses • Minimize exposure to risks associated with use • Provide flexibility for future generation(s) • Maintain the family dynamic

4. To Plan • Begin considering the following questions: • Children’s income or financial condition • Proximity and usage • Upkeep • Taxable value • SEV • Use of the cottage by spouse, grandchildren • Seasonal and off-season use

5. To Plan, cont. • Pets • Smoking • Rules • Penalties • Who opens/closes the cottage • Do-It-Yourself vs. hired maintenance • Other assets, such as boats, ATVs, etc. • Third party renting

6. Not to Plan • Taxable value of property will be uncapped when passed to heirs from estate or trust • “New” owners will be left to determine issues such as: • Payment of taxes • Use of cottage • Payment of maintenance costs • Resolution of conflicts among themselves

7. Not to Plan, cont. • Often results in one of the following: • Lawsuit among owners • Forced sale to a third party • One owner buying out others • Strained family relationships

8. Property Tax Uncapping • Michigan law provides that, in general, a property’s taxable value is “capped,” meaning that it cannot increase more than 5% from year to year. • However, when a “transfer of ownership” occurs, the taxable value is automatically “uncapped” and increased to approximately 50% of the market value of the property.

9. New Exemption • Beginning in 2014, a new exemption from uncapping for interfamily transfers was created. • However, at the present time, this exemption does not extend to transfers from probate estates or trusts. • Transfers to and from entities may also be subject to uncapping.

10. Solution 1: Outright Transfer to Next Generation • This method may work when: • The taxable value of the property is close to half of its market value • The current owners no longer wish to be involved in or responsible for management of the property • The current owners are able to bear the potential gift tax associated with this transfer

11. Solution 1: Outright Transfer to Next Generation, cont. • Potential drawbacks: • No mechanism in place to resolve conflicts among new owners, absent some additional work • Cottage may be subject to creditors of new owners or to spouses in the event of divorce • New owners are left to address issues relating to pets, maintenance, rental, etc.

12. Solution 2: Lady Bird Deed • This solution may work when: • Current owners want to retain property and pass to next generation at death • Current owners wish to avoid cottage being included in probate estate

13. Solution 2: Lady Bird Deed, cont. • Potential drawbacks: • May not avoid uncapping due to uncertainty in the law • No mechanism in place to resolve conflicts among new owners, absent some additional work • New owners are left to address issues relating to pets, maintenance, rental, etc. • Cottage may be subject to creditors of new owners / former spouses in divorce after death of original owners

14. Solution 3: Joint Ownership • This solution may work for: • Owners want a simple structure to avoid probate and pass to next generation • Owners wish to avoid the uncapping of taxable value associated with an outright transfer of ownership

15. Solution 3: Joint Ownership, cont. • Potential drawbacks: • Depending on type of joint ownership, there may be no mechanism in place to resolve conflicts among owners after death • New owners are left to address issues relating to pets, maintenance, rental, etc. • Cottage may be subject to creditors of new owners / former spouses in divorce after death of original owners • Depending on the type of joint ownership, one of the new owners may end up taking all to exclusion of others as second generation passes away

16. Solution 4: Trust Ownership • This solution may work when: • Original owners wish to identify rules and regulations for control of property • Future owners wish to take advantage of potential income tax benefits upon death of original owners • Can have certain advantages for individuals who expect to pay estate tax upon death

17. Solution 4: Trust Ownership, cont. • Potential drawbacks: • Trust becomes inflexible and hard to change upon death of person creating trust • Failure to address all potential issues in trust sets up potential for conflict among trust beneficiaries • Under current law, property taxes may uncap upon death of original owner

18. Solution 5: Entity Ownership • This solution may work for: • Owners wish to have a structure in place for addressing common issues associated with cottage • Owners wish to provide some protection from creditors / divorce of future owners • Owners wish to provide enough flexibility in ownership structure to account for unforeseen changes • Owners wish to gift percentage of ownership to future generations over time

19. Solution 5: Entity Ownership, cont. • Potential drawbacks: • Taxable value of property can uncap if done improperly or transferred in the future • Original owner may lose control over cottage as interest is gifted to next generation • No principal residence exemption is available

20. Takeaways • Plan early, and have conversations with family to determine: • Who, if anyone, may be interested in owning the cottage in the future • Who can bear the burdens of cottage ownership • Assemble a team of advisors to assist in planning: • Attorney • CPA • Financial Planner

21. Takeaways • Determine the true annual cost of ownership of the cottage, including: • Insurance • Taxes • Association dues • Maintenance/repairs/replacements • Are the members of the next generation going to be able to cover these expenses, or is a separate fund going to be necessary to provide funding • Review the cottage plan with your existing estate plan to make sure it is consistent

22. Questions? John R. Blakeslee | 231-486-4555 | jblakeslee@shrr.com Stephen C. Chambers | 231-486-4546 | schambers@shrr.com Kevin M. Huss | 231-724-3214 | khuss@shrr.com Robert W. Parker | 231-486-4504 | rparker@shrr.com