Multigenerational Planning for the Family Lake Home

The COVID-19 pandemic created a new appreciation, and perhaps a need, for personal recreational spaces. For families who are fortunate enough to own a lake home or other recreational real estate (hereinafter, a “lake home”), these are assets that should be given renewed attention in their estate plans in order to protect them for future generations to enjoy. While there are multiple tools that can be used for this purpose, currently the most powerful tool is the limited liability company. Here are five of the most important reasons for utilizing a limited liability company to own the family lake home.
 

1. Easy to Establish and Largely Private.
   The process of creating a limited liability company is not overly burdensome. In Indiana, the company is established by filing Articles of Organization with the Indiana Secretary of State’s Office. The “Articles” are generally only a couple of pages long and list some information about the company, including the name of the organizer (who is often the drafting attorney) and the company’s address. The details of the company’s operations and the names of the company’s owners are not included and, therefore, do not become a matter of public record when the company is created.

2. Creates Structure for Operations.
   The specifics of the company’s operations are contained in a separate document known as the Operating Agreement, and that document is not filed with the Secretary of State’s office and does not become a matter of public record. The company can be set up with managers who operate the business on a day-to-day basis or those tasks can be left to the owners of the company (known as “members”). Often, an LLC that is used for a lake home might only have two assets—the lake home/real estate itself and a bank account with cash for maintaining the lake home. In other instances, it might also include adjoining land, one or more boats, and other equipment used on the land. Even so, the day-to-day business of the company is often quite simple—perhaps involving paying utility bills, managing the lawn service, providing maintenance on the boats, and similar tasks. The Operating Agreement could dictate that larger capital expenditures (for instance, replacing aging windows or an unsafe dock) must be approved by a majority or all of the members and not simply by the manager(s) of the company. The Operating Agreement can also establish ground rules for the use of the lake home by which all members must abide. For instance, if there are multiple branches of a family who own interests in the LLC, the Operating Agreement can dictate the process for choosing the weeks and holiday weekends that each branch of the family will have for their sole use of the lake home. Such guidelines can be a strong shield against family conflict, and particularly so when the first generation has passed away and the number of members of the company has grown in generation two. Finally, the Operating Agreement could also contain the founding generation’s philosophy about the use of the home—for instance, as a space for building and maintaining family relationships and certain traditions.

3. On-going Lifetime Control and Ease of Gift Giving.
   Often the matriarch and patriarch are the sole owners of the lake home, and they wish to remain in control of it during their lifetimes while at the same time transitioning portions of the ownership to the next generation. In these instances, it can be helpful to establish two classes of ownership units—(i) voting units and (ii) non-voting units. The owners who hold the voting units can remove and replace the company’s manager and can be in control of decision making for major company expenditures. At the same time, those same owners can begin transitioning ownership of the LLC through transfers of only their non-voting units. Over time, these gifts will bring the next generation into the ownership structure (allowing them to learn about the property’s history, carrying costs and maintenance needs, and other important matters), and will allow for the value of those non-voting units (including any growth in value) to be moved out of the matriarch’s and patriarch’s potential taxable estate. Looking further into the future, the ownership interests included in those potential estates could be small enough to receive valuation discounts at that time if the owner holds only a minority ownership interest in the company.

4. Limits on Owners.
   Operating Agreements for lake homes will typically include provisions to limit who can readily become a new owner of the LLC. For instance, as a hedge against divorces or an existing owner “cashing out” through a sale to a third-party, the operating agreement often states that an owner is unilaterally permitted to transfer ownership interests to other owners or to descendants of the matriarch and patriarch, but not to others. Further, if an owner attempts to transfer ownership to a non-permitted transferee, then the other owners, or the LLC, typically have an option to purchase those interests first, which sometimes includes a valuation method and discounts for the purchase price. In this way, the Operating Agreement’s restrictions attempt to keep ownership of the LLC in the family.

5. Liability and Partition Protection.
   It should not be overlooked, of course, that one of the primary benefits of an LLC is the potential creditor protection that is provided to the owners. If the company is run according to its protocols, and a visitor on the property is injured, the potential liability exposure to the owners should be limited to the assets owned by the LLC and not each owner’s other assets. Additional liability and umbrella insurance, owned by the LLC, can provide added protection. In addition, an often-overlooked benefit of the LLC is that a disgruntled owner cannot institute a partition action to force a sale of the family’s lake home. If the same property were owned by siblings as tenants in common, it is entirely feasible that a disgruntled sibling could force a sale through a partition action on the real estate.

There are, of course, other nuances and facts (both legal and personal) to consider and analyze before transferring ownership of a treasured family lake home to an LLC. Still, the foregoing benefits certainly highlight how an LLC can promote and create an environment for families to continue enjoying the family lake home for years to come.
 
If you would like further information, or guidance, please contact Steve Latterell in Ice Miller’s Trusts, Estates & Private Wealth practice group.

This publication is intended for general information purposes only and does not and is not intended to constitute legal advice. The reader should consult with legal counsel to determine how laws or decisions discussed herein apply to the reader's specific circumstances.