Family cabins are often a source of memorable family experiences, and assets most likely to be kept in the family as part of an estate plan.
In most family cabins, the parents (generation 1) are the original owners, and at some point pass the property on to their children (generation 2). We have worked both with parents and with second generation owners to structure cabin ownership in a way that meets their needs.
Joint Ownership - the default rule
The most common way the children (generation 2) own the property is to own undivided interests on a single deed. In that case, Wisconsin statutes set out the rules governing the owners’ business relationship with each other. Under those statutes, any owner may sell or transfer his or her interest at any time to anyone. In addition, in an impasse any owner can force the property to be sold through a judicial sale.
In many cases, these default rules work just fine, especially when generation 2 is small and close-knit, the sibling/owners have a common vision for the property, and all owners want to use the property and are able to pay their share of the costs associated with the property.
The potential problem often comes when something changes. Perhaps a sibling is no longer able to pay for maintenance, moves out of state and does not use the cabin anymore, or wants to transfer their interest to their spouse or their children (generation 3). Perhaps the remaining siblings from generation 2 are not sure they want to be partners with certain nieces or nephews who are part of generation 3. Or perhaps some members of generation 3 have different ideas or expectations regarding use of the property.
To get ahead of this problem, the parents (generation 1) or children (generation 2) may want to agree on different rules than are found in the statute. In particular, they might want to restrict transfers, limit the situations where the property would be sold to a third party, or set out clear expectations regarding changes in ownership. This is done by setting up an LLC and creating rules within the LLC governing the business relationship.
Principles for Harmonious cabin ownership
There are many ways to structure the business relationship between joint owners to facilitate smooth, harmonious ownership. In our experience, the most successful joint ownership situations follow three principles:
The ownership group should stay relatively small.
Existing owners should be able to choose whether to accept new members.
Any owner who no longer wants to be part of the cabin can leave and receive fair value of their interest.
Why? With regard to the first two principles, the more cooks are in the kitchen, the more likely conflict becomes. Like it or not, a family cabin is a business, and wise business owners choose their partners carefully.
With regard to the final principle, forcing someone to lose out financially in order to leave a business creates bad incentives and resentment. If the departing owner is bought out at a discount, they may think they were taken advantage of by the other owners. A disgruntled owner who stays an owner out of spite is even worse.
Changing the default Rules Using an LLC
Following these principles, we generally recommend that our clients structure these types of cabin LLCs with the following rules:
Management of day to day decisions is by an owner who serves by majority vote of the group. However, major decisions (adding on to the cabin, for example) require consent of all owners. (In some cases, we instead require a supermajority, such as 75-80% of owners).
Any owner can transfer at any time (lifetime or at death) to anyone. However, at the time of the transfer, the remaining owners (both as a group and, if the group does not act, individually) can buy out the new owner(s) at fair market value. (Sometimes there are exceptions to this allowing transfers to blood descendants and/or spouses without triggering an option depending on how the owners want to handle this issue.)
Any owner can be bought out for fair market value at any time. The way this works is that the owner who wishes to leave gives notice, an appraisal is obtained, and the remaining owners (again, both as a group and, if the group does not act, individually) can buy the departing owner out. If all decide not to buy the owner out, the property is split and the proceeds split according to ownership.
This is not the only way to do this. There are other potential structures, most commonly cabin LLCs where only descendants of the original owners can be owners, and anyone leaving can surrender their ownership interest but receives little or no compensation. We generally do not recommend these, as in our view they conflict with best practices. However, our job is to make sure our clients understand the issues, not enforce any particular solution. We can accommodate families who wish to create different rules based on their own preferences.
Why an LLC?
An LLC (limited liability company) is a business entity, and is most commonly used for small businesses. However, an LLC also is useful as a way for multiple owners to hold recreational property, since it allows the owners to set their own rules for joint ownership by agreement. By holding property in an LLC, the owners also limit their liability for actions related to the property taken by their co-owners or other third parties.
How the Process Works
Like all of our work, setting up a cabin LLC starts with a no-obligation consultation to discuss the situation and available options. If the current cabin owners are the parents, this is typically done as part of their estate plan.
If the current owners are the siblings (generation 2), a cabin LLC can only be created if all siblings agree on the terms. The first step, as always, is a no-obligation consultation (typically, a zoom call) with the siblings to discuss the issues and work from there. We do ask that all siblings be involved in that call, as absences mean some owners are not engaged in the process and the chances that a project will be completed are low.
Ready to get started? Call our office to schedule a no-obligation consultation.