Cottage planning has become an important topic in part because of recent changes in the law concerning property tax uncapping, but more importantly because of the financial and emotional havoc that failure to plan can wreak on families. Often, failure to properly plan for passing down the family cottage results in lawsuits among future generations, sale of the cottage to a third party, and/or strained family relationships, to say the least.

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

3. 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?

4. 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

5. 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

6. 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

7. 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

8. 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

9. 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.

10. 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.

11. 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

12. 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.

13. 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

14. 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

15. Solution 3: Joint Ownership
• Types of Concurrent Ownership:
– Tenants in common (no survivorship)
– Joint tenancy (survivorship, may be severed)
– Joint tenancy with full rights of survivorship
(survivorship)
– Tenants by the entireties (survivorship)

16. 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

17. 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

18. 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

19. 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

20. 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

21. 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

22. 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

23. 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

24. 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