Family Cabin LLCs & Trusts
While a family cabin is often filled with happy memories, conflict can arise when the cabin’s owner dies. Now comes the time to plan future ownership and responsibilities. If the cabin has been gifted to the former owner’s children, as often is the case, it is not uncommon for disagreements to turn into serious family conflicts. Some family members may want to split responsibilities equally, while others may want nothing to do with it. Unless protective measures have been taken, one owner has the power to force a sale of the cabin against the wishes of the other owners. This is why it’s important to address potential problems before they can cause rifts in the family. Many common disputes can be avoided by restructuring ownership of the cabin in one of two ways.
One option is to put ownership of the cabin in a limited liability company (“LLC”). An LLC is a type of business form where ownership is assigned to a member or group of members, and management is assigned to either the member(s) themselves or a separate individual(s) known as a “manager.” There are many great advantages to restructuring ownership of the cabin in this way. One benefit is the option of creating an operating agreement, which is a legal document that would outline the specific rules for the cabin’s future ownership and operation. Creating an operating agreement would allow you to tailor your rules so that they best fit your family’s vision for the cabin in the future. You could require ownership to stay with family members, or you can require majority approval for more significant decisions regarding renovations, rather than letting a single person dictate. Also, the owners of an LLC receive “limited liability,” which means they do not have to pay out of their own pockets if the LLC is sued. Lastly, LLCs have perpetual life, meaning they cannot be dissolved unless the owners make specific filings to do so.
Putting ownership of the family cabin in an LLC will also have disadvantages, most of which relate to following legal formalities. While many of the initial forms required for LLC formation are straight forward , you would likely need to hire an attorney to write the operating agreement. LLCs are required to hold annual owner meetings and make yearly filings with the Secretary of State. Your family would have to spend a significant amount of time thinking about how to structure the operating agreement to best suit everyone’s wishes. The bigger the family, the harder this task will be.
Another option is placing ownership of the cabin in a trust. Trust ownership would permit cabin owners to achieve some of the same objectives that LLC ownership allows. It is possible to appoint multiple trustees and give them different management roles for cabin duties. A trust could also establish procedures to follow for decision-making processes. Unlike LLCs, you would not have to follow the strict legal formalities of annual meetings and filings. Overall, trusts are less complicated and require less attorney oversight than forming an LLC would.
However, trusts do not last forever in the way an LLC does. The trustee(s) possess sole decision-making power, and thus decision making in general is less autonomous when ownership of the cabin is placed in a trust. Decisions made amongst multiple trustees must have obtained unanimous consent. As I’m sure you can imagine, obtaining unanimous consent will not always be easy. Trustees are also not shielded from having to pay out of personal assets if the trust is sued. Any rules and procedures a trust creates must be specific to particular beneficiaries (family members) of the trust. Therefore, when family members change or pass away, those rules become less relevant or even void. While having multiple individuals serve as trustees can be beneficial, it can also cause conflict.
When it comes to planning current and future ownership of a family cabin, there will be plenty of issues to work through. At the end of the day, everything will relate back to who owns the cabin now and what their vision for the cabin is moving forward. Do they want to sell it? Would they like to see ownership stay in the family? The most important lesson any family can learn is simple: plan ahead. Communicate openly with your family members in order to figure out what options best suit your goals.