JGB May 2024 Newsletter
Many families count among their most treasured possessions some distinctive ancestral property. This may be a mountain cabin, a lake, beach, or river house, a hunting lodge or even the old family farm. These places are dear to families as both a place of vacation and respite, and as locations which in some way embody the family’s identity. For the purposes of this article, what distinguishes ancestral property is your desire to keep the property in your family for generations.
Maintaining any property is difficult; but ensuring a property’s proper upkeep and shared enjoyment over the course of two or three generations is impossible unless the original generation made provisions for the property’s management and support. This article will first explore the pitfalls of ancestral property and then explain in brief how your goals could have been better served by creating a trust or business entity to hold the property for your descendants.
Selling Camelot to Pay the King
Without planning, an ancestral property will likely be sold to an outsider within a couple generations and may cause deep family rifts in the process. The Federal Estate Tax used to drive a lot of decisions about property at death, but that has been mitigated by the historically high exemptions seen in recent years ($13.61 million in 2024). While you may not have paid much for the house on the Outer Banks or the mountain acreage many years ago, it will be taxed based on the fair market value as of the date of your death. Make sure you talk to your attorney and accountant about the tax liabilities your special home bears and how to mitigate the bite of any taxes at death.
Further, owning any property is expensive and difficult. As a property shifts from one owner to three owners in the second generation and to nine owners in the third generation, it becomes increasingly difficult for a family to agree how to share the work of cleaning and maintenance, divide the costs of insurance and property taxes, and determine which improvements are made. It can also be hard for a family to allocate the available weeks or weekends among the many family members. This confusion leads to family arguments and sometimes to splits within families that never heal.
As heirs become more remote, some will have no attachment to the family homestead. These grandchildren and other remote heirs can ask the court for a forced sale or ‘partition order’ or to liquidate their share of the family property. Worse, an heir’s divorce or creditor could do the same.
Planning for the Future
For your property to remain in the family for generations, you must set up a system which includes:
- A system for decision making,
Funds to maintain the property or a mechanism by which the later owners will contribute funds, and - Protections to keep ownership within the family.
Typically, this system is either a Trust or a business entity such as a Limited Liability Company (LLC). In a Trust, the property would be held in trust and managed by trustees, who are selected according to how you, the trust’s creator, determine. The Trust would hold property and funds for maintenance for the benefit of your heirs for a set time or in perpetuity. Trusts cannot be changed after your death so they can be a bit inflexible for the needs of later generations. Also, trusts don’t have a natural mechanism for collecting funds from beneficiaries when needed for taxes, maintenance, or improvements.
Your Family Cabin, LLC
An LLC is an excellent option to manage and preserve family property. In life or through an instruction to your trustee after your death, you would create a company to hold and manage your ancestral property. You would give your heirs shares in the company. The LLC would list who could be a member (LLCs call shareholders ‘members’); many LLCs set up for ancestral property prohibit outsiders from being members. Other agreements allow a shareholder to give their shares to a spouse but to no other outsider. As the organizer, you get to make the rules.
The members of the LLC elect managers who govern the company. Each year, the members have a meeting and vote on how to allocate the vacation time, which improvements to make, and selection of a manager for the coming year. Family members who cannot make the meeting can vote by proxy. Family members who do not wish to participate in the joy (and the expense) of the old family property can either forfeit their shares or sell back their shares to the company.
You can preserve the family cabin as a treasure for your grandchildren and beyond, but you must set up a system for them that allows them to be successful. If no system is made, within a generation or two the heirs will not fairly distribute the use and expense of the ancestral property and the family cabin will likely fall into extreme disrepair and/or be sold to a third party. As with so many things in life and law, a little bit of work and organization now can prevent mess, expense, and hurt feelings later.