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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” 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.
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:
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.
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