A common theme in estate planning here in lake country involves what to do with the family cabin. Two frequently utilized options are a family cabin in a trust or limited liability company (LLC). Each method, as an estate planning tool, has its pros and cons depending on the specific circumstances.
A typical Cabin trust is an agreement whereby you, as the settlor, establish an entity and hold the cabin in a revocable trust. The trust becomes irrevocable upon your passing and its assets are held for the benefit of your named beneficiaries.
An LLC, on the other hand, is a company with membership interests. Depending on the Operating Agreement, those membership interests may be sold and modified as any other company during or after your lifetime.
With new changes in Minnesota trust law, the ability to modify an "irrevocable" trust has increased. That being said, in general, an LLC is more flexible in terms of its management, transferability, and modification.
The following are some key differences between the two methods of holding a cabin.
Control and Modification: A trust is established by you, as settlor, and during your lifetime can typically be modified by you. Upon your passing, the trust becomes irrevocable and any rules that you may have created in that trust are more or less set in stone. Thus, when establishing a Cabin trust, you need to be especially careful in how the legacy is passed down from each generation, the rules that govern the use of the cabin, and the flexibility necessary for its efficient administration. An LLC is a business entity. You create an Operating Agreement which defines rules for the use and governance of the cabin. The Operating Agreement, however, can be modified based on a consensus of members - typically a majority. If unforeseen situations arise in regard to members use or family dynamics, an LLC can typically be easier to modify to accommodate those changes.
Management: A trust is administered by the trustee. Typically, that would be you until you pass, and then a Successor trustee named in the trust. A Successor trustee can be one or more individuals, but if they can't get along, Court intervention is often necessary to mediate disputes. The trustee is responsible for making sure that the rules are followed, the property is maintained, taxes are paid, etc. The trustee has a fiduciary duty to the beneficiaries to maintain the trust in accordance with the trust agreement. An LLC is typically governed by the members or by a Board of Governors. Administrators are typically elected by the other members based on percentage of ownership. The management structure can change with the voting as set forth in the Operating Agreement. The members or the board can appoint one or more individuals to make sure that the cabin is properly maintained, the taxes are paid, people are paying dues, etc. The members can create or modify rules in regard to usage and maintenance of the cabin (e.g. - putting the dock in, mowing the lawn, cleaning, etc.). An LLC will have annual reporting requirements and requires annual meetings and minutes to be kept.
Creditor Protection: A trust is probably a better vehicle for creditor protection for your children and/or other beneficiaries. It typically won't stop creditors from coming after you, but assuming there is a spendthrift clause in the trust, creditors cannot typically get to a beneficiary's interest in a trust. Thus, if someone were to obtain a judgment against your child or some other beneficiary, they would not be able to get to the beneficiary's interest in the trust. An LLC, on the other hand, is typically available to creditors of an owner. A creditor is generally not permitted to force a sale of an LLC interest, although that can vary, but the creditor could, in some circumstances, put itself in the place of the beneficiary or member.
Liability Protection: The liability of an LLC, assuming proper formalities are followed, is limited to the assets held by the LLC (i.e. the cabin). Individual members are generally not liable for those debts and costs of the LLC. Likewise, the liability of beneficiaries of a trust is similarly limited to assets held by the trust with one key difference - as it relates to you as the settlor, creditors are not limited to the trust's assets. That liability protection does not necessarily apply to trustees who may be personally liable for malfeasance of trust assets.
Sale or Transfer of Interests: During your lifetime, settlors (you) of a revocable trust can remove the cabin property from the trust or otherwise sell it. Upon your passing the trust will become irrevocable, and, unless you have enumerated the circumstances upon which the trust may be sold, it will remain in the trust until the trust terminates or a Court says otherwise. An LLC is more fluid. If the members are in agreement, LLC property can typically be sold or transferred. This means that one of your children who lives on the West Coast may sell his interest, for example, to another cousin or sibling upon your passing. Under previous Minnesota law, a minority owner of an LLC was entitled to certain dissenter's rights which in certain circumstances would allow that member to require the other owners to buy him or her out. Current Minnesota law does not provide that default rule, although it can be a part of an Operating Agreement. Generally speaking, the Operating Agreement will contain buyout language or other triggering events that would require the LLC to either purchase a member's interest or otherwise divest the member of the interest. The LLC is very flexible with regard to this, and can be tailored to specific situations.
Duration: An LLC can be established for an indefinite duration while a trust has statutory limits on its duration. The limits are significant so duration is typically not an issue.
Funding: Requiring successive beneficiaries to contribute to the ongoing maintenance costs of a cabin can be difficult to establish in a trust. Generally speaking, people fund the trust with additional assets to pay for that ongoing maintenance, including taxes, insurance, and general upkeep of the property. If the settlor has funds and intends to use those for such a purpose, a trust is often the better vehicle to make sure those funds are kept for the benefit of the cabin. An LLC is easier to control by whom and how payments are made for the maintenance of the cabin property. Rules can be set in place that require certain payments or, if they are not, a dilution of that person's membership interest. Thus, if the owner does not have significant funds to fund a pot from which the cabin maintenance can be used, typically folks will use an LLC structure. The foregoing is a very general list of the some of the pros and cons of establishing a trust vs. an LLC for holding cabin property. Each situation is remarkably different from the other and varies significantly based on your personal circumstances.
The comments posted in this blog are for general informational purposes only. They are not to be considered as legal advice, and they do not establish an attorney-client relationship. For legal advice regarding your specific situation, please consult your attorney.
Copyright 2015 Swenson Lervick Syverson Trosvig Jacobson Schultz Cass, PA