Should You Use a Trust or LLC to Keep the Cabin in the Family?

Two of the most popular approaches to keeping the revered family cabin in the family are to either place the cabin in a revocable trust or set up a limited liability company (LLC) to own the cabin.

Both approaches have pros and cons. Which technique will work best for you depends on your goals, circumstances and chief concerns.

With either the revocable trust or LLC, your children won’t own the cabin directly. That feature has some practical advantages.

Here’s a taste of the disadvantages of direct ownership by your children: If a child gets divorced, the child’s divorcing spouse could stake a claim on the cabin. Similarly, if a child faces creditor problems, the cabin could be subject to creditor claims. If a visitor gets hurt while at the family cabin, your children may be personally liable as owners. And, even if only one of your children wants the cabin sold rather than kept in the family, that child has the right to initiate a “partition” action in court to force a sale of the cabin.

Some of the other considerations surrounding family cabins are: Who gets to use the cabin and when? Is each child willing and able to contribute equally to the labor and expense of maintaining the cabin? What happens when a major expense, such as a new roof, comes up? What if some children live far away and don’t use the cabin, or live close but would rather sell the cabin than keep it?

With a trust, your trustee calls the shots by following the terms you spelled out in your trust. Thus, the ideal revocable trust for a family cabin is a specialized “Cabin Trust” — a revocable trust separate from any other revocable trust that you may have, and one that only deals with matters concerning the family cabin.

With a properly organized LLC, there’s an operating agreement that spells out the ground rules, and cabin-related decisions are made by majority vote. For major decisions, such as the sale of the cabin or a major investment in the cabin, the LLC operating agreement could require voting approval by a number larger than a simple majority.

Cabin-related activities – boating, swimming, snowmobiling, use of chain saws, possibly drinking or other partying – trigger concerns about liability.

For liability issues directly connected with the cabin, the LLC may be a better choice than the trust. A LLC protects its member owners from personal liability for most LLC related obligations unless there has been a “piercing of the corporate veil”. Although trust provisions also may protect your children from liabilities stemming from the cabin, there’s a catch. Namely, if your children make any contributions to the trust – such as providing money to maintain the cabin – then the liability protection is undermined because your children are no longer merely beneficiaries of the trust.

Another type of liability relates to claims of creditors against one of your children. These liabilities are not directly tied to the family cabin, but the family cabin may get caught up in these claims as creditors seek sources of funds for payments owed to them by a child. The creditor could seek the sale of your beloved cabin to pay off the debts of that child.

When it comes to creditor claims against your children, the revocable trust appears to be a better protector of the family cabin than a LLC. In Minnesota, if the trust was not funded by your children and the trust includes a so-called “spendthrift” provision, then your child’s creditors can’t touch the family cabin. In other words, your child’s creditors cannot force the sale of the cabin to retrieve cash, and cannot prevent your child from continuing to use the cabin.

This protection is especially strong in Minnesota, where courts have said that your children’s interest in a revocable trust can’t be reached even by divorcing spouses or for child support.

A partition action isn’t likely with either a trust or LLC because of the governance structure of trusts and LLCs. Disputes can still end up in court whether you have a trust or a LLC. However, the court would be interpreting the trust or LLC agreement rather than responding to the whim of the one child who wants a partition action to force the sale of the cabin, even though the majority of your children want to keep it.

If maximum flexibility is your primary goal, a LLC may be better than a revocable trust. The LLC operating agreement typically can be amended by majority vote. A revocable trust can be amended while the trust’s creators – the parents – are still alive and mentally competent, but the trust becomes irrevocable upon the incapacity or death of the parents.

Both the specialized Cabin Trust and LLC are able to address such issues as family usage, expectations for contributions of labor and money to maintain the cabin, and penalties for non-compliance with previously agreed-upon ground rules. However, because the trust agreement becomes irrevocable upon the incapacity or death of the parents, the LLC provides for longer-term flexibility. Over time, the cabin will likely be owned via a trust or LLC by multiple owners across multiple generations, and they may have differing attitudes toward the cabin.

When possible, it’s a good idea for the parents to provide a pot of money for the ongoing needs of the cabin property, including maintenance, insurance and property taxes. This money helps avoid disputes that may be triggered if some children do not have the financial wherewithal, or desire, to maintain the cabin. A trust may be a better protector of the “pot” than a LLC, particularly given the irrevocability of the trust document after the parents die. With a LLC, your children may vote to do something else with the money.

This blog covers only some of the options and considerations that cabin owners should consider when desiring to keep the family cabin in the family. It’s best to consult with an estate planning attorney to consider which option best applies to your situation and goals.

©2014 Wittenburg Law Office, PLLC. All rights reserved.

Disclaimer: This Blog is for informational purposes only and is not to be construed as legal advice. If you have questions, please seek the advice of an attorney licensed to practice law in the state where you live. Wittenburg Law does not expressly or implicitly warrant the accuracy or reliability of any of the Blog’s contents. An attorney-client relationship is not formed by reading this Blog. If you are interested in Wittenburg Law’s representation of you, you must contact Wittenburg Law for a determination of whether your matter is one for which Wittenburg Law is willing and able to accept representation of you.

Bonnie Wittenburg, Wittenburg Law Office, PLLC, 601 Carlson Parkway, Suite 1050, Minnetonka, MN 55305         952-649-9771     bonnie@bwittenburglaw.com   www.bwittenburglaw.com