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Who Inherits the Cottage by the Lake?

It’s summertime and if you’re fortunate enough to own a vacation home, you’re likely there, adding more memories of pontoon boat rides, fish fries and Fourth of July celebrations.

But if you see those traditions continuing long after you’re gone, you’d better find out whether your children have the same plan—and then put it in writing. If you don’t, trouble ahead could spell the end of your family legacy.

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“For many families, the family cottage is one of the most valuable assets that mom and dad own,” says David Fry, coauthor of Saving the Family Cottage and a senior partner at Rockford, Mich.-based law firm Blakeslee, Fry and Scales, which specializes in cottage succession law and planning.

According to the 2000 Census, there are more than 3.5 million vacation homes in the country, many of them handed down from parents to children. The issue, Fry explains, is that some siblings see a cottage as part of the family heritage and want to hang on to it at any reasonable cost, while others view it as an economic asset to quickly turn into cash.

Without a cottage succession plan in place, ownership goes to all children equally—and the result is almost always conflict.

Worst-case scenario: One sibling would rather have cash over a share in the cottage and the other siblings are unable to produce the buyout lump sum without selling it.

“I have clients where siblings aren’t even speaking to each other anymore,” he adds. “In many cases, I’m hired as much as a family counselor and mediator because the lines of communication have become so fractured that it’s impossible to do anything.”


A sucession plan

Making a plan can be complicated, especially when multiple marriages are involved. Valerie Atkin, 58, and Russell Pitts, 62, were newlyweds in 2001 when they purchased a cottage in Saugatuck, Mich. They immediately considered the future impact that the property—a two-bedroom, two-bathroom cottage with a 400-square-foot guest house—might have on their adult children from their first marriages.

The couple was determined to ensure the property wouldn’t bring discord among the children later on. Atkin had just lost her mother and had seen disagreements firsthand over items worth much less than a piece of real estate.

So Atkin and Pitts sat down with her three children and his two individually to get their input before meeting with an attorney. “It basically worked out that two of mine and one of his liked the idea of keeping the cottage,” she says. Her daughter, who now lives in another state, and one of his sons, who owns a boat that his family consider to be its cottage, were less interested in keeping it.

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The agreement that was subsequently drafted leaves the cottage entirely to her children—her money was used for the down payment—with the understanding that both of Pitts’ sons will be able to use it. But the couple considers this to be only a temporary solution, and intend to revise it to spell out buyout options as well as designate a usage schedule.

Dealing with a legacy means dealing with death. And many parents find it difficult to initiate the subject with their adult children, says Dr. Chip Long, a psychologist in Little Rock, Ark. But he says it’s important that parents find a way to share the thought process behind their decisions and hear their children’s concerns.

“You don’t want to hold off until a crisis hits and then have to rush through one of these types of discussions,” adds Long.

A buyout plan

If your heirs don’t agree about keeping the property, Fry strongly advises creating a buyout plan. This would include a provision to minimize the financial burden for family members who buy out a sibling.

The buyout price is typically set at substantially less—perhaps 30 percent lower—than if the cottage were sold to a third party, he says. Payment terms can extend over many years.

A decision then needs to be made about whether or not the bought-out sibling has a right to occupy, or even visit, the property. “It’s not unheard of for some people to sell their interest and feel they [still] have a right to enjoy the place,” says Fry.

Greed for quick money may play a role for some sellers, says Fry, but often adult children simply can’t afford the maintenance costs of the property or the property taxes—especially in tough economic times.

One way to mitigate such pressure, Fry says, is to set up an endowment from other assets that will generate income to pay expenses. This reduces what children have to contribute annually.

Fry says there are typically several other issues that should be included in a cottage succession plan:

  •  Decision making about common homeowner issues such as repairs and maintenance.
  •  Division of maintenance costs, property taxes and other expenses.
  •  Scheduling of usage of the cottage.
  •  Ownership rights if one of the co-owner siblings dies. Does a surviving spouse inherit the share?

A succession plan is basically a “once-in-a-lifetime opportunity to minimize the amount of conflict with your children,” says Fry. “You should get a plan in place—and understand that not all of your children are going to agree with all of it.”

Darci Smith is a freelance writer who lives in Chicago.

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