By Rachel Scott-Hovland
Our family cabin is a beautiful place in northwestern Minnesota overlooking a peanut shaped lake seven miles long. We watch beautiful sunsets in summer and winter. It's a special place for me; the first kiss with my
husband happened in a thunderstorm under the picture window watching the lightening strike out over the lake.
My husband and his sister bought the cabin before he met me and verbally agreed to share the costs of the mortgage and the capital improvements (it was a major fixer upper). My husband got to live there if he would do the home improvements. Twenty some years later, the cabin has been transformed into a small three bedroom, two bathroom house with lots of beautiful character. While he lives with me in our home in Minneapolis, he still visits the cabin during his work week traveling through northwestern Minnesota. The great news is the cabin has appreciated tremendously in value. The cabins and trailer homes around us have been replaced with lovely retirement homes and the gravel road is now asphalt. We own it free and clear and have simply shared the expenses for years.
While both of our families have completed our estate plans, we had never discussed the long term financial succession of the family cabin. It was simply not discussed. (the Scandinavian way!) But with my husband turning 54-years-old and his sister turning 64, it really was time to have the conversation about what would we do with the cabin in the event one of us dies. What if both of us die? What if one set of kids wants the cabin and the other wants to sell? What if someone fell down the stairs and sued us for personal injury? We knew we needed to do something but we weren't sure exactly what we wanted to do.
From my perspective, I've always been careful with money. I knew that not having clear direction and consensus within the family was really not smart. I've known families torn apart by assumptions that weren't true or arguments about how the cabin should be used or about who should be mowing the grass or paying for costly repairs. I knew we had been lucky so far that we hadn't had any serious family blow ups but I also knew that if we didn't establish some boundaries soon – we inevitably would have some issues.
Bottom line – I really didn't want the cabin to become the family issue – the original purpose had been to create a place for the family to gather and have a good investment for the long run. We needed to get all of our thoughts and fears out on the table, talk to an attorney, and get something on paper we all could sign.
Our attorney first recommended we establish a document called a family partnership. He advised us to write up our concerns, sign the document and file it with the attorney as the document we would follow. To start us off he suggested we have a formal Family Meeting with the four primary owners: my husband, me, his sister and her husband. That was the best thing we ever did.
First we wrote down our ideas and shared a tentative agenda and set a date. The first meeting was long, a bit awkward at times, but in the end we all felt good about airing our thoughts and concerns. We decided what the process would be if one of us wanted to sell the cabin, what would happen on our death and who was responsible for maintenance. We agreed to keep a family calendar including how many weeks of time each family would get as their personal family time. And, we decided how we would track finances. From that paper, our attorney drafted a Family Partnership document. We individually edited and edited it again, until we were all happy with the document. Note that this process took about a year to work through.
Just as we were about to sign the document, the issue of liability came to a head. Both of our families have assets in other real estate and hope to be able to retire in the near term. If we got sued by someone with an injury that happened at the cabin, they could not only take the cabin, they could go after both of our families other assets as well. And that was not a good thing.
The Limited Liability Corporation (LLC) was the solution for us. We incorporated all of the language we had created for the Family Partnership and inserted it into the LLC business structure. The Family Meeting became the Annual Meeting and we each now have voting rights and roles on the board of directors. At the annual meeting we discuss everything anticipated for the year. Rather than the cabin discussion being an emotionally charged discussion, we have a business framework through which we can have discussions and vote on outcomes. I think all of us feel that it is a fair way to come to decisions.
Bottom line, the LLC has taken the worry of "what if this happens" at the cabin. We know our boundaries and if there is an issue, how we will approach resolving it. It's been a good thing so far and for the approximately $2,000 it cost in attorney fees, it is worth every penny.
Discussion Point Recommendations:
- Cabin owners with clear ownership percent documented – voting rights (couples vs. individuals)
- Financial Accounting Procedures and financial accounts – common accounts, whose name, who manages
- Capital expenditures and maintenance costs – decision process, accounting and responsibility
- Maintenance – who, how often, how much, long term vs. short term
- Cabin use schedule and cabin rental agreement – negotiate time at the cabin for vacations, immediate family, and kids' family, are we okay with renting to friends?
- Cabin succession planning – clear guidelines regarding how the cabin could move to the next generation – or not
- Withdrawal of Family Unit from Partnership or LLC – rules regarding how one family can opt out of "The Cabin" if they choose
- Death or divorce – rules regarding death or divorce situations, ownership and voting rights after death or divorce
- Valuation of Property – agreement on how to value property in the event of sale (internal or external)
- 1Agreement to Third Party Arbitration in the event of unresolvable disputes