The Wealth & Wisdom Blog

For many Minnesota families, this is the time of year in which the family cabin is the physical epicenter of family life and the source of many great family memories. A few years ago, I outlined how a matriarch and patriarch might transfer the cabin to their family following their deaths.  In this month’s update, I offer a list of questions to those families who are already the co-owners (or anticipate being co-owners) of cabin property with family members.

In creating a co-ownership plan, the cabin owners should agree on the following issues with their fellow cabin owners:

• Ownership Percentages. Will each of the family members own the same percentage regardless of how much each of them actually contributed?  Alternatively, will the family members track equity interests based on financial contributions?
• Use Rights. Will all the owners be entitled to equal use regardless of ownership percentage, or are use rights directly tied to ownership percentages?
• Expense Allocations. Are expenses allocated based on ownership percentages or use percentages?
• Management Rights. Who is responsible for managing the expenses of the cabin (“Manager”), including paying carrying costs and deciding whether to hire outside vendors for maintenance?
• Improvements. Does the Manager appointed by the owners have the right to unilaterally decide on improvements, and are those improvements allocated as expenses or proportionately to the owners?
• Ground Rules. Who among the owners or the Manager has the authority to create and enforce ground rules for the property?
• Ownership Rights.  Who would be entitled to receive an ownership interest by reason of gift or inheritance—only children, or can spouses also inherit the interest?
• Triggering Events. Finally, what events cause a member to have his or her ownership interest subjected to a right of purchase by the other owners?

Our law firm generally implements this planning using a limited liability company (“LLC”). The LLC would own the real estate and bank accounts associated with the cabin. The family members would own the LLC ownership interests, called membership interests. The family would create a legal agreement among the LLC owners, called an operating agreement that governs these rights. This agreement can always be revised as circumstances evolve.