Planning for inheritance is key to avoid turning a family cabin from a dream to a nightmare

BY JEFFREY P. MOLEVER, ESQ., AND KIMBERLY L. FRANK, ESQ. —
Many Minnesotans have fond memories of visiting their parents’ or grandparents’ cabins as children. Families venture to their cabins in the summer for swimming, fishing, waterskiing, roasting marshmallows, campfire stories, and, most importantly, to spend quality time with family. So, it is no surprise that most cabin owners want to encourage their families to continue this tradition of family togetherness and outdoor recreation.

When cabin property is passed to the next generation, competing agendas, busy schedules, and financial issues often turn what was once a dream of family harmony and outdoor recreation into a logistical nightmare. This is especially true when proper planning was not in place prior to the transfer or inheritance of the cabin property.

Further, the unresolved logistical and financial issues can strain family relationships. Anything from maintaining the cabin, sharing costs, sharing use, or even failing to visit the cabin regularly can impact the relationship of family members sharing the use and/or ownership of the cabin.

The importance of planning ahead

What is a family to do in order to keep the dream alive? Plan ahead. The logistical issues such as maintaining the property, paying expenses, timing of the right to use the property, and succession of the cabin are key issues in family disputes over cabin property. 

Often families will deed their cabin to their chosen beneficiaries. Simply giving a deed of the cabin to your heirs does not address these issues and leaves the property vulnerable to your heirs’ current or future creditors, ex-spouses, bankruptcies, and loss to Medical Assistance (if your heir has an accident or serious illness and becomes dependent on government assistance). Gifting the cabin property to family members during one’s lifetime rather than at death can also create potential capital gains issues for family members if the cabin is later sold.

Common ways of addressing inheritance issues

Revocable Living Trusts, Irrevocable Cabin Trusts, Limited Liability Companies, and Limited Liability Partnerships, when the governing documents are drafted properly, can all address these important issues in different ways and help to preserve family harmony.

Appointing a decision-maker (Trustee, or Managing Party) to make key decisions as to how a property will be maintained and directing the creation of a maintenance fund (to be funded during life or at death) which covers maintenance, real estate taxes, and other costs associated with keeping the cabin in vacation-worthy condition can help to eliminate the two main sources of conflict: money and control.

Holdback Trust: an important tool

It is important to note that a Limited Liability Company and a Limited Liability Partnership may not provide the same level of protections available to your beneficiary’s inherited interest in the cabin that would be available through a Holdback Trust. A Holdback Trust is our general term for a trust into which a loved one’s inheritance passes. Certain Holdback Trusts can even be controlled by the beneficiary, but protected from creditors, ex-spouses, bankruptcy, and Medical Assistance, under certain circumstances.

The Molever Law Firm drafts Holdback Trusts into nearly all of our Revocable and Irrevocable Trusts to ensure that inherited assets are protected. However, we rarely see Holdback Trusts in the trust plans we review from other law firms. Most of the trust and will plans we review that are drafted by other law firms only provide for outright transfers of cabin interests at death, which can jeopardize a beneficiary’s interest the moment the cabin interest passes into his or her own name.

It is very important that consumers understand that Revocable or Irrevocable Trust language and options drastically differ from each other. Just because one law firm drafts a trust for you, does not mean that there will be Holdback Trusts built into your plan to protect each beneficiary’s inherited cabin interest, or that other vitally important options will be present.

When it comes to designing and drafting a trust plan, it is crucial that consumers choose a trust plan that incorporates important options that allow their goals to be carried out.

What if the dream becomes a nightmare, and it later becomes necessary for subsequent generations to sell the cabin? Revocable Living Trusts, Irrevocable Cabin Trusts, Limited Liability Companies and Limited Liability Partnerships (if proper terms in the governance and/or accompanying documents are drafted), can direct how the decision to sell the cabin can be made and how the proceeds from the sale are to be divided.

Ultimately, to preserve the family harmony that your cabin encourages, plan to preserve the property and family relationships by putting a proper plan in place to address issues before they arise. It is also important to work with a law firm that understands the dynamics involved in family cabin planning and seeks to protect the cabin interests to be inherited by loved ones.

A carefully drafted trust plan addressing the cabin issues in advance can allow you to leave a legacy to your family instead of an ordeal that causes family disharmony and lingering hostilities.

Jeffrey P. Molever, Esq. is a co-founder of The Molever Law Firm, in Plymouth, Minnesota. He has practiced in the areas of estate planning and taxation since 1982.

Kimberly L. Frank, Esq. is an attorney at The Molever Law Firm. She has practiced in the areas of estate planning, trust administration, and probate, since 2003.

(Posted: June 19, 2009)