/>iFor many families, a cottage is more than just real estate; it’s a place of tradition, togetherness, and lasting memories. As time passes, cottage owners may want to consider the long-term future of their retreat. Thoughtful planning now can help ensure the property remains a source of joy for future generations while preserving the values and connections it represents.
Why Cottage Planning Matters
A cottage is often among a family’s most emotionally significant assets, and sometimes one of the most valuable. Deciding how it will be passed down can be challenging, requiring thoughtful consideration of family dynamics, tax implications, and how to manage shared use and responsibilities. Several legal strategies are available to help owners plan for the next chapter of their cottage’s story.
Common Strategies for Cottage Succession Planning
1. Qualified Personal Residence Trust (QPRT):
This is an effective tool when estate taxes are the primary concern. A QPRT holds title to real property for a specified period, during which the grantor retains the exclusive right to use the property. Upon the term’s expiration, the property passes to the designated beneficiaries. This benefits the donor by reducing the gift tax value to the property’s fair market value minus the value of the retained interest. However, a QPRT does not address shared ownership and use after the trust terminates. Additionally, the trust termination may uncap property taxes.
2. Joint Ownership Agreements:
Michigan law exempts certain transfers of jointly held property from uncapping. Adding a spouse, child, grandchild, parent, or sibling to the cottage title should not result in uncapping and may be part of a broader plan to transfer ownership to a younger generation. Yet, this arrangement comes with risks, including concerns regarding control of the property, increased liability exposure, and unintended gifting and tax consequences. A joint ownership agreement is essential to outline how decisions are made, costs are shared, and usage is managed.
3. Ownership by Trust or LLC:
Transferring cottage ownership into a trust or limited liability company (LLC) can provide greater structure and protection. Trust Agreements and LLC Operating Agreements can include rules regarding property use, expense payment, dispute resolution, and transfers after an owner dies.
This approach avoids the pitfalls of “tenants-in-common” ownership, which becomes increasingly problematic as more descendants acquire fractional interests in the cottage. Trusts and LLCs also provide flexibility as family members’ involvement changes over time.
An LLC provides some liability protection for the cottage owner and allows the owner to manage the property while gradually transferring control. A drawback of the LLC structure is that property taxes will be uncapped after more than 50 percent of the beneficial interests of the LLC have changed owners (and again each time more than 50 percent of the beneficial interests of the LLC are transferred thereafter). As a result, families who have owned a cottage for decades sometimes find that property tax uncapping considerations alone drive the decision between a trust and LLC structure, as a property tax uncapping can make continued ownership cost-prohibitive.
Factors in choosing a trust vs. an LLC include:
- Reducing estate and gift taxes for multiple generations
- Preserving control vs. granting future flexibility
- Gifting of cottage interests
- Facilitating the use of the cottage by others, whether informally or by renters
- Providing liability and creditor protection
- Managing decision-making and expenses
- Property tax considerations
4. Gifting LLC Interests Using Annual Exclusions:
Owners can reduce their taxable estate by making “annual exclusion” gifts of membership interests in an LLC that holds a cottage. In 2025, individuals may give up to $19,000 annually (or $38,000 for a married couple) in assets to as many people as they wish without federal gift tax consequences.
Under current tax law, valuation discounts may apply to minority interests in an LLC, allowing a donor to give membership interests worth more than the stated gift tax value. Future legislation may change or eliminate the availability of these valuation discounts, so the donor should be aware of the law in effect before gifting interests.
Cottage Planning Achieves Family Goals
Without a succession plan, unresolved issues such as taxes, ownership disputes, and unclear expectations can erode the joy and meaning that family cottages bring. There is no “one-size-fits-all” approach. Family goals and personal relationships will influence the ultimate decisions.
