Last week we shared an article on planning for your Ohio vacation home. The bottom line of the article was that vacation homes have very specific and often troublesome issues, and it’s important to make plans for how these special properties are passed to your loved ones. If you own a vacation home in Michigan, the need for planning is no less than if your vacation home is in Ohio (or anywhere else). However, the approach needs to be different.

In that article, we noted that a Limited Liability Company (LLC) is often the most effective tool for planning for the future of your vacation home, as they allow you to plan for – and thus avoid – the issues that could arise. LLCs “provide an easily transferable form of ownership and an Operating Agreement spelling out the rules for operating the property and transferring interests.”

In Michigan a transfer of real estate into an LLC triggers an uncapping of the real estate tax which can result in a significant property tax increase for the owners. A different approach is needed to avoid this tax increase.

Using a Cottage Trust

Using a “cottage trust” is a better approach for vacation home planning In Michigan. (Note: although we use the term “cottage trust,” it is effective for whatever type of property your vacation home is – a cottage, a condo, or a cabin). A cottage trust is a single asset revocable living trust that is created for the purpose of owning a vacation home. While the transfer of real estate into an LLC uncaps the taxes, a transfer into a trust does not.

Use a Hybrid Approach to Plan for your Michigan Property

We’ve already pointed out that an LLC is the best way to plan for a vacation home, but that using a trust is better in Michigan for tax reasons. Unfortunately, using a trust limits the ability to create the rules governing the ownership, transfer, use, financing and sale of the cottage interests for future owners that we can establish through an LLC. We therefore solve this issue by using a hybrid plan: a cottage trust that uses an LLC to manage the property.

Essentially, the way the plan works is as follows:

  • The owners create a revocable trust, naming themselves as the trustees and the present beneficiaries of the cottage trust, and transfer their vacation property into the trust.
  • At the trust makers’ deaths, the trust provides that the “beneficial interest” – the right to use, maintain, and enjoy the vacation home – is passed down to the specific beneficiaries and transfers the beneficial interests through the generations. The title is maintained by the trust, and there is no uncapping of the taxable value under Michigan tax law.
  • To address the administration of the cottage, this hybrid plan provides that the trust enter into a management agreement with an LLC. The trust delegates matters like payment of expenses, management, and usage to the LLC and its management structure. The operating agreement for the LLC is created when the cottage trust is created, and the terms of the operating agreement are designed by the trust makers.

Every family is different, and every family will approach the planning for their family vacation home differently. We are here to help you work through the issues and come up with a plan. Call us at 419-872-7670 or reach out to us through our website today to schedule a no-cost initial consultation.