Planning for Your Vacation Home - Types of Ownership
Article by David Hill
The family cottage. For many Great Lakes residents, it is almost a sacred place, the source of incredibly rich and rewarding memories that carry on from generation to generation. But the death of a parent, competing family interests and especially tax implications can create serious complications and even lead to the loss of this treasure trove of summer memories.
To avoid these complications and preserve your vacation home or cottage requires early planning. One of the greatest challenges with succession planning for your cottage revolves around the use of the cottage among a large number of family members. It becomes especially challenging when dealing with economically and socially diverse groups of extended family members.
Ideally, you should plan for your cottage at the same time as your purchase, or soon thereafter. This is often not practical as you may not yet know if you intend to preserve the cottage for your family. If you do not plan early in the ownership stages, uncapping of property taxes could present a significant consideration. The concept of uncapping property taxes arises from Michigan’s mandate that the taxable value can only increase by the lesser of inflation or 5.00%. If the true cash value of the property increases at a higher rate, your taxes will be “capped” at the lower amount. Transfers of real estate “uncap” the property taxes unless an exemption applies. An uncapping could increase annual property taxes by thousands of dollars per year, meaning this is a significant consideration.
In 2014, the Michigan legislature enacted MCL 211.27a(7)(s) which provides for an uncapping exemption if the transfer is to a related person. A related person includes a spouse, father, mother, son, daughter, or sibling. This new law allows advance planning for your cottage by titling or transferring the property differently – that is, you make a transfer to one of these qualified persons, avoid an uncapping, and also provide for succession of your cottage. If you use a joint ownership technique to plan for your cottage, you also need to incorporate an ownership and management agreement to govern the relationship between the owners.
As an alternative to direct ownership of the cottage by family members, many prefer using a limited liability company to own the property. The LLC structure can provide a great amount of flexibility and governance over the use of the cottage, but a transfer to an LLC will result in an uncapping of property taxes. The LLC also provides liability protection which is not present in a direct ownership structure.
The final possible ownership structure involves use of a trust. A trust can own the property and be controlled by appointed trustees. The trust can provide a similar planning flexibility as an LLC but the trust cannot be perpetual – this means the trust can only exist as long as the lifetime of the party forming the trust and for that person’s children and grandchildren.
Choosing the correct form of ownership requires many considerations. Only a review of your individual circumstances can guide you to the right choice of ownership to preserve your cottage for future generations.
Posted on July 07, 2015
Tagged as Real Estate