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D?tente at the Cottage


For Alice Byers, sharing ownership of a two-bedroom beach cottage in Grayland, Wash., that she and her four siblings inherited from their father in 1985 was "like being consigned to hell." They disagreed about everything from scheduling visits to whether to exterminate carpenter ants. After 10 years of bickering, Byers had had enough and proposed that the others buy her out of the property, which also included adjoining beach and marshland parcels. They refused, so she handed over her one-fifth interest??orth at least $30,000 at the time??o her brother and bought a house on Lummi Island, a comfortable distance away.

Whether it's a cottage on the Pacific or a ch??teau in Normandy, what's meant to be a dream legacy can turn into a nightmare. To avoid that, families need a system for running and maintaining the house, paying for all the associated expenses, and an exit strategy for those who want out.

The best way to keep the property and the family intact starts with the original owners. Rather than make heirs joint owners, most lawyers recommend leaving the property to an independent entity, such as a trust or a limited liability company (LLC), and giving the heirs shares in the enterprise. The plans should also include a way to sell or transfer shares. For tax reasons, property should not be placed in a corporation, says Stuart Hollander, a lawyer in Suttons Bay, Mich., and author of the forthcoming Saving the Family Cottage: A Guide to Succession Planning, which he is self-publishing.

Whatever the vehicle, the biggest issue is: "How is the family going to be able to afford to keep this property intact?" says Stephen Small, a Boston lawyer who's an expert on family-held lands. Some benefactors set up an endowment funded with cash, securities, business interests, or the proceeds of a life insurance policy. Jane Allen Fenster and her brother, joint owners of a Hilton Head (S.C.) house they inherited from their father, plan to put the property in a trust for their adult children (they each have two), with enough money for a year's expenses. The trust will permit them to buy out each other or sell the property to a third party.

A simpler approach is to leave the property to the estate and give family members a right of first refusal to buy it, says Howard McCue III, a trusts and estates lawyer with Mayer, Brown, Rowe & Maw in Chicago. You can limit that option for, say, one year, and give a preference to people who want to purchase the house as a group, says McCue.

TWO CABINS, 16 RELATIVES?br>

There are myriad solutions to the problem. Consider the descendants of Theodore Sedgwick, a senator, congressman, and judge whose Federal-style house in Stockbridge, Mass., has been in the family for more than 200 years. Robert Sedgwick, a New York lawyer, says his father and a couple of other family members bought the house from a cousin in 1940 for a nominal sum and put it in a trust to benefit all the judge's descendants.

From then on, bequests and lifetime gifts from generous family members have supplied its primary endowment, while a member of the Sedgwick family who works in the arts has occupied it. In exchange for a modest rent, this tenant is responsible for maintaining the house and the family graveyard nearby, hosting family weddings and funerals at the home, and booking visits by other Sedgwicks who can spend weekends and vacations in the guest wing.

The more owners, the more organization you need. Harry Drucker, who manages apartment buildings in the Chicago area, and 15 other siblings and cousins own two lakefront homes in Michigan, one of which his maternal grandfather built in the 1930s. Today the two cabins are run like a small business, with use fees from family members and other guests financing their operation and covering annual property taxes of $20,000 a year.

It wasn't always like that, says Drucker, who has childhood memories of cavorting at the cabin. Drucker's grandmother left the properties in a trust that had no other assets. When the grandchildren were young, their parents, several of whom were trustees, kicked in funds as necessary—to update the wiring or fix the roof. There was no mechanism for making decisions or for dealing with the aftermath of a beneficiary who died or got divorced.

Nearly 20 years after his grandmother's death, the grandchildren, by then grown, agreed with the trustees to correct these flaws. They transferred title to an LLC with an elaborate operating agreement. Among other things, it provides that the grandchildren can only sell or give their LLC interests to their grandmother's descendants—a provision that rules out ownership by people who marry into the family.

THE MECHANICS OF HARMONY

For houses actively shared by many family members, lawyers recommend an agreement anticipating all the issues that may arise. Settle in advance how you'll allocate time slots—whether you'll draw straws or rotate use for popular periods, says Wendy Goffe, a lawyer with Graham & Dunn in Seattle. Even soft issues, like whether you hire a maid and a gardener, "have the potential for causing family conflicts just as much as money does," Goffe says. You can distinguish between decisions that require a vote (such as capital expenditures costing more than a certain amount) and those that don't (like emergency repairs or basic maintenance).

Inevitably, there are disparities in how much people use the house. In Drucker's family, any grandchild can rent the cabins at market rate, but to vote about their day-to-day management they must have been there for three weeks in the preceding five years. Mike Riley, who inherited a house last year on Vancouver Island, B.C., with his two brothers, anticipates that he will oversee the property and be there the most. So far it's unclear whether his siblings will compensate him for caretaking. One possibility is for him to accrue sweat equity that would entitle him to a bigger share if they ever sell the house.

Another potentially thorny issue is what to do if one inheritor wants out. The possibilities range from having other family members pay the full share of the appraised value to imposing a discount and installment payment plan, says Hollander. Having a family-friendly buyout clause fosters tradition but still allows for a graceful exit. It certainly would have saved Alice Byers a lot of grief.

By Deborah L. Jacobs


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