Many Michiganders own a family vacation home or cabin up north or elsewhere that holds a lifetime of memories and is an integral part of the family’s legacy. But what happens to the property when the original owners (usually the parents) pass away? Putting the vacation property in a cottage trust may be the answer.
Proper estate planning for your family vacation home is essential. Without the right approach, your family can face a myriad of problems when you are no longer there to take care of everything.
Family cottage trusts are increasingly popular in Michigan. Here are some of the important reasons why.
Under Michigan law generally, a transfer of ownership of real property results in an increase in the taxable value of the property in the calendar year following transfer. This increase in value that occurs after a real estate transfer is referred to as “taxable value uncapping.”
A change in Michigan tax law in 2014, found at MCL 211.27a(6), creates an exemption that allows the owners of a family vacation home or cabin to transfer the property to their children (and certain other relatives) without increasing the property’s taxable value. Avoiding taxable value uncapping in a family transfer can save a substantial amount in property taxes over the long term.
The tax exemption applies to a “change in beneficial use” of property accomplished by transfer into a trust. This type of trust is often called a cottage trust. Using a trust enables the parents to address issues that may arise among family members after the parents no longer control the property.
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:
The transfer into the trust may occur during the parents’ lifetimes or after death. The choice of timing depends on the parents’ and family’s needs and circumstances.
A cottage trust offers a number of benefits for the present owners of the family vacation home, as well as future generations, such as:
As discussed above, putting the home in a trust can avoid property tax increases, if the transfer is accomplished properly and in accordance with the exemption provisions in Michigan law.
Setting up a cottage trust during their lifetimes enables parents to maintain control and retain their use and enjoyment of the vacation home or cabin. At the same time, the trust protects the family legacy for the future by continuing to govern the property for the benefit of future generations after the parents pass away.
A cottage trust can address operation and use of the property for future generations. The trust document may include assigning responsibility for specific items such as:
Putting the governing terms in the trust itself avoids potential disagreements over these issues among family members. In addition, a properly drafted trust can avoid future problems involving divorced family members and creditors of family members.
A properly drafted cottage trust can eliminate the need for the property to go through probate when the owners pass away, which maintains the privacy of the family’s financial matters relating to the home and avoids probate costs and attorney fees.
The first step to take in planning the future for your family vacation property is to talk with your family members to ascertain their interests and plans for the future. Regardless of what approach you use for your vacation residence, you need to take all those factors into account.
Then, you should talk with an attorney who understands Michigan real estate and estate planning for family vacation homes. A cottage trust is not the only option for addressing the future and protecting your family’s legacy. There are other legal options. Before the property tax exemption was adopted, LLCs were a popular way to protect family vacation properties. Since 2014, more and more families are choosing to use a cottage trust.
Deciding on the best approach for maintaining family harmony and keeping your legacy intact depends entirely on your and your family’s interests, goals, and needs. The only way you can determine the best option for your family is to talk with an experienced attorney. Whatever you do, avoid doing nothing and do not take the risk of using a do-it-yourself (DIY) approach. Doing so may well create a lot of problems for your family and your legacy in the future.
In my practice at Ager Law Office, I help individuals and families with all aspects of real estate and estate planning, including cottage trusts for family vacation homes. From my Ann Arbor office, I serve clients throughout Washtenaw County. To talk with me about a new estate plan or about updating your existing plan, call (734) 649-0784, send an email to firstname.lastname@example.org, or use the online contact form.