What are the Advantages of Using a Trust to Keep your Michigan Vacation Property in your Family?

Keeping Your Getaway in the Family for Years to Come

Vacation Property in Michigan has many forms and can include, cottages, cabins, open land for camping or hunting and even second homes. However, what happens to the family vacation property when the owners, usually parents, pass away? Many parents of vacation property would like to keep their vacation property in the family. Consequently, it is important for parents to consider a plan for the future of the family property while they are still in good health and able to have informed discussions with family members.

Advantages of using a trust, typically referred to as a “Cottage Trust”, to keep your vacation property in the family.

Avoid uncapping and reassessment of property taxes

Michigan tax law provides an exemption that allows the owners of family vacation property to transfer the property to their children and other related family members without an “uncapping” and reassessment to increase the property’s taxable value. The tax exemption also applies to a “change in beneficial use” of property accomplished by an owner’s transfer of the property into a trust.

In order to qualify for this beneficial tax treatment, specific criteria must be met. First, the property cannot change to commercial use following the transfer. In addition, the transfer must occur between the owner and a person (or persons) with one of the following relationships to the owner:

• Spouse
• Child or spouse’s child including adopted children
• Grandchild or spouse’s grandchild
• Parent or spouse’s parent
• Siblings.

The transfer of the family property into the trust may occur during the owner’s lifetime or after death. The choice of timing for the transfer of the property depends on the needs and circumstances of the parents and their family.

Given the market value increase in Michigan vacation property, a property tax uncapping and reassessment of value can make continued ownership of the property cost prohibitive for family members. Consequently, avoiding uncapping and reassessment is an important financial consideration.

Maintaining Control

Creating a trust for vacation property during an owner’s lifetime enables you to maintain control over the property and make any changes to the trust as circumstances change. Upon death, the trust property is transferred to family member in accordance with your instructions in the trust, bypassing probate administration.

Management Flexibility.

In the trust, you name a family member or a trusted person as a trustee to insure the property is managed according to your instructions in the trust. Note that if there are major changes in the in the family, like death or divorce, you can change the terms of the trust. Putting the governing terms for the management and use of the family property in the trust can also help to avoid disagreements over these issues when you are gone.

If not all you children want the family property, you can consider equalizing the inheritance for your children by leaving other assets to a child or by allowing the children who want to keep the property to buy out the other’s share.

Avoiding Probate and Maintaining Financial Privacy.

A properly drafted trust avoids probate administration which is a court supervised process that is a matter of public record that can be costly and lengthy. Consequently, eliminating probate administration maintains the privacy of the family’s financial matters relating to the property.

Talk to Your Family.

It is essential to have a family discussion to determine if your children want to keep the vacation property and if so, the extent of their interest. Also to consider: What are their plans for the future? Do they all want to keep the property? How do they plan to use the property? Will they be able to maintain the property and pay the property taxes? How will costs and use of the property be shared?

Note that a trust is not the only option for keeping property in the family. There are other legal options including LLCs. Before the property tax exemption was adopted for trusts in Michigan, LLCs were a popular way to protect family vacation properties. However, more and more families are now choosing a trust because an LLC will cause the taxable value of the property to be uncapped and reassessed to market value.

Schedule a Free No Obligation Consultation with an Experienced Ann Arbor Real Estate & Estate Planning Attorney.

The next step is to talk with an attorney who understands Michigan real estate and estate planning for family vacation homes. Deciding on the best approach for keeping your vacation property in the family and maintaining family harmony depends entirely on you and your family’s interests, goals, and needs. Avoid the risk of using a do-it-yourself approach. The only way you can determine the best option for your family is to talk with an experienced attorney

In my practice at Ager Law Office, I help individuals and families with all aspects of real estate and estate planning, including trusts for family vacation homes and property. From my Ann Arbor office, I serve clients throughout Washtenaw County. For a free no obligation consultation, call Bill Ager directly at (734) 649-0784, send an email to bill@agerlawoffice.com, or use the online contact form.