Excerpts and notes from 'Saving the Family Cottage'
by Stuart J. Hollander Attorney (Author), Rose Hollander (Author), Ann O'Connell Attorney (Author)
The book is filled with many practical examples, including several that are similar to our situation or could be in the next generation. It is worth reading all the way through just to get these case studies in view.
The following excerpts are the bits that struck me as either surprising or overwhelmingly important upon first reading.
Chapter 4: The perils of Tenants in Common ownership (i.e., our current ownership structure)
Nine rules that govern TiCs:
1. Each tenant in common has a right of partition (or forced sale of everything.)
2. Each tenant in common owns an undivided interest
3. A tenant in common has a right to transfer their interest to any person at any time.
4. A tenant in common does not owe rent to other owners for using the cottage
5. A tenant in common can rent out the cottage to third parties without the consent of other owners.
6. A tenant in common is not is not required to compensate a cotenant for services associated with management of the cottage
7. A tenant in common is not entitled to reimbursement for repairs unless they are necessary to preserve the cottage
8. A tenant in common who pays a disproportionate share of expenses is not necessarily entitled to reimbursement.
9. A tenant in common has only limited duties to other tenants in common
Chapter 6: How a Plan Helps Save the Family Cottage
Unlike a TIC, a spouse has no dower interest in a partner’s share of a cottage LLC. (Page 64). The cottage LLC protects the family’s interest in the cottage despite the divorce or death of a family member.
Under TIC, a creditor that acquires ownership rights in a cottage may force a sale of the cottage to collect a debt. An LLC blocks that avenue. (Page 66)
Under a TIC, any owner can force a sale of the entire property to be cashed out. Under an LLC, the rules can span a wide range, from no buyout to establishing price and terms. This topic is covered extensively in Chapter 14.
Under a TIC, an owner doesn’t need anyone’s permission to make a change to the cottage as long as those changes would not be viewed by a court as destructive or damaging. (Page 68) An LLC can set decision rules in the operating agreement about how improvements are made.
Chapter 10: LLC membership rules - page 116 and on
The operating agreement may lay out rules for automatically permitted transfers of ownership, conditionally permitted transfers, and prohibited transfers. For instance, “cottage LLC operating agreements normally permit an owner to transfer their interest in the company to their descendants or to their estate planning trust without the need for anyone’s permission.”
Prohibited transfers could include transfers to a creditor or a member’s ex-spouse. (Page 120). A second line of defense can be to force the ex-spouse or creditor to sell the interest back to the LLC under set terms.
There is a lot of content in this chapter about “The Branch Concept” that is all new to me but very interesting and sections may be useful for us. I need to digest it more before summarizing.
Chapter 11: Cottage Democracy - pg 128
A lot of good ideas here about what responsibilities are put to the full ownership group and what might be handed to a committee or manager. A detailed example (pg 132) lays out the roles of a maintenance and operations manager, a financial manager, and a scheduling and record keeping manager.
Chapter 13: Renting the Cottage - pg 150
This is a heavy chapter that contains a bunch of stuff that doubly applies to us because of the rental to Dawn and Rory plus the occasional rental to people like Lorol. Again, I need to re-read it and digest it more, but here is one point on liability that jumped out:
Assume a renter is injured and receives a large judgment in their favor. If it is in excess of our umbrella (which is a robust $3m thanks to Jeff’s wariness), the injured party can force a sale of the whole property AND go after our individual assets -- under the TIC structure. An LLC at least shields our personal assets.
Chapter 14: The Cottage Safety Valve - pg 164
This is probably the most important chapter in the whole book. "A good cottage plan will allow family members to make a graceful exit on terms that permit the rest of the family to be able to afford to keep the cottage. The flexibility of the LLC allows you to craft a compromise: give heirs the right to sell their interests back to the LLC, but at a reduced price and with favorable financing for the company."
"An heir's right to compel the LLC to purchase the heir's membership is called a "put option", or simply 'put.' When forming your LLC, you must establish the put price, the financing terms imposed on the selling member, and when that member may exercise that put."
There are three methods for valuing the property in the LLC: a stipulated value, an assessed value or a professionally appraised value. Whichever method is chosen gets added to the LLC's cash minus any debt the LLC may have.
The Discount (pg 167) -- Many cottage succession plans impose a discount on the price paid for the interest of the exiting heir, as well as financing terms for the exit. The example given in the book is a 30% discount to the calculated valuation, with only 20% of that amount paid up front and the rest paid in installments over ten years (with interest). Each of those factors can be set in the operating agreement.
When a put may be exercised: "the operating agreement should limit members' ability to exercise their puts." There are a few approaches to limit the timing in the book (page 171), such as setting the maximum amount of debt that can be carried by the LLC.