Family Cottage Partition Lawsuit

How to Create a Cottage Plan to Avoid a Partition Lawsuit

Most problems for parents who wish to pass on the family cottage stem from the legal definition of their shared cottage ownership. There are many different ways to hold title to real estate, but the solution rests in the "ownership relationship" of the family cottage. To protect and preserve the family's valuable legacy asset it is important to move the cottage out from under the hazards of real estate laws to the flexibility of entity laws.

There are two ways of how you hold title to real estate:
directly, or
indirectly

Direct Ownership of Real Estate
When you are a "direct owner" of real estate you are governed by the duties and rights of Real Estate Laws. These rights, and how real estate laws impose duties on "direct owners" often surprise cottage owners. Real estate laws promote the rights of individual owners and do not promote the rights of multiple generations of family owners. As many family members learn, it's real estate law surprises which put the family cottage at risk. Because of the principles behind our common law system that no individual can be required to own property the threat of partition and turmoil among co-owners always exists.

Indirect Ownership of Real Estate
You become an "indirect owner" of real estate when you transfer the title to your property to a legal framework which is governed by the duties and rights of an Entity Law. Laws of Trusts, Partnerships, Corporations, and Limited Liability Companies and examples of Entity Law. Entity Laws are extremely flexible and accommodate the realities of commerce. A Limited Liability Company, which is a fairly new form of a business entity, provides the protection required to keep the cottage in the family for future generations.

The flexibility of Entity Laws to create a limited liability company will provide the legal framework and provisions for multiple cottage owners and generations of family ownership, versus Real Estate Laws which favor the rights of the individual real estate owner. Once formed, you own "membership interests" in the cottage limited liability company can then easily transfer "memberships units" in the cottage real estate to your children and other heirs. This method of title transfer is also an important consideration to prevent the "uncapping" of the assessed value of your cottage property.

When you form a limited liability company for your cottage property you will also create a cottage operating agreement. The operating agreement is where you determine the rules to cover every aspect of the cottage operation including scheduling, expenses, permissable owners, renting, maintenance, annual budgets, plus more. The operating agreement prevents a forced sale of the cottage property through a partition lawsuit but is where you can establish a defined plan of payment for "graceful exits" of family members.

A cottage operating agreement is flexible and can be modified by you at any time. Even though there are standard items which are a part of every cottage operating agreement, each cottage operating agreement is unique to each family's needs. In spite of how well your children work together right now, have a plan in place to decide issues in the future is a gift to them.

Developing a cottage succession plan now, even a simple plan, assures you of the safety of your cottage property for future generations, avoids the jeopardy of a crisis, and eliminates the need for an emergency rescue plan.