Managing the Family Cabin: A Pre-Summer Guide to Shared Ownership of Recreational Use Property

Weather forecasters are already predicting a long hot summer in the Pacific Northwest, and that means that local public pools, splash pads, and ice cream shops will soon be packed to the gills. For those lucky enough to have access to a family-owned lake cabin on one of Washington’s 8,000 lakes, it’s time to pack up and head out to your home away from home where weeding, cleaning, and other chores await. But hold on—wasn’t it the other side of the family’s turn to open the cabin this year?

Shared ownership of a recreational property, such as a lake cabin or mountain ski retreat, can often lead to confusion and frustration. What started as a great idea can become a headache as families grow and the original terms of use are forgotten. Fortunately, with some advanced planning and open communication, you can create an estate plan or management agreement to keep your shared lake property a source of joy for generations to come.

Why You Need a Shared Use Agreement

Before diving into the legal details, it’s important to understand why your estate plan or management agreement needs to include terms of shared use. Here are a few common reasons to seek legal guidance now, rather than waiting for problems to arise:

 

1. Keep the Cabin in the Family

The most common reason lake property owners seek a shared use agreement is to ensure the cabin stays within the family. Divorce happens, and when it does, a properly drafted estate plan or management agreement will help your family avoid passing the shared property outside of the family.

 

2. Keep the Family in the Cabin

Shared use of the property should be enjoyable for everyone. Clear guidelines and agreed-upon rules can prevent misunderstandings and disputes that might otherwise drive family members away from the property.

 

3. Keep the Family and the Cabin Out of Court

Settling disputes in the family is preferable to legal battles in the courtroom. A well-drafted agreement can outline a process for resolving conflicts, saving everyone time, money, and stress.

 

Creating a Legal Framework

Now let’s discuss the steps for creating a comprehensive plan for managing and passing down your family’s shared lake property. This process applies equally to other recreational properties like mountain ski cabins or off-the-grid secondary homes as well. Here’s a three-step framework for managing shared ownership of a recreational property:

 

1. Identify the Type of Agreement

Determine whether the agreement will serve as part of an estate plan or will be implemented as a current management agreement.

 

2. Draft a Master Agreement

Create a Master Agreement that lays out the overarching legal framework binding all shared owners.

 

3. Codify the Cabin Rules

Outline the principles of day-to-day shared use in a set of Cabin Rules.

 

Types of Ownership Structures

Property ownership can be structured in various ways, which influences how property can be transferred. The most common types of shared ownership are Tenancy in Common and Joint Tenancy with Right of Survivorship.

 

·      Tenancy in Common: Each owner has an equal right to possess the property even though their respective shares can be unequal. Owners can transfer their shares during their lifetime or through inheritance.

·      Joint Tenancy. Joint tenants own an equal share in the estate and share the profits and obligations arising from the estate equally. The hallmark of Joint Tenancy is the right of survivorship. When one tenant dies, the other joint tenant(s) automatically assumes the interest of the deceased tenant leaving nothing for surviving heirs to inherit. The last living joint tenant owns 100% of the property.

 

For our discussion, we’ll assume the property is owned as a Tenancy in Common.

 

Methods for Transferring Ownership

There are three primary methods for transferring ownership of a recreational property:

 

1. Purchase and Sale Agreement

 Like most forms of real estate, a lake property may be transferred from one generation to the next using a Real Estate Purchase and Sale Agreement. This type of property transfer can have unfavorable tax consequences, but it does convey the property from seller to buyer with no strings attached. For someone who wishes to pass a cabin down to a single person, or a single family, this option may be the most straightforward if the seller does not wish to exert any further control over the property once it has been sold. Seller financing or a leaseback option may also be appropriate in some circumstances.

 

2. Trust

A trust owns or holds the property for the benefit of its beneficiaries. The main benefit of a trust for the person passing the property (settlor) is that it allows them more control over the property either during their lifetime or after their death. (For example, the dock shall be shared with the neighbors for as long as they continue to own the cabin next door.) The primary benefit for the beneficiaries is that the property is passed outside of probate, which can be an extended process involving interpretation of a last will and testament. Further, the settlor may fund the trust with an initial pot of money (endowment) to cover certain future expenses associated with the property.

 

3. LLC

The Limited Liability Company (LLC) is a business entity that exists into perpetuity for the purposes established in its operating agreement. The primary benefit of an LLC is that it can shield its members from personal liability should an accident occur on the property premises. (This characteristic might be of particular interest should you or your family choose to use the property as a rental.) Like a trust, property owned by the LLC passes outside of probate, but unlike a trust, the creator of the LLC typically exerts no control of the property after their death. The LLC is best used as a tool for conducting business and avoiding liability, not as a means of establishing the family’s traditions and expectations across generations.

 

Drafting the Master Agreement

A Master Agreement is crucial for setting the overarching principles for property use and management. This agreement can take various forms, such as Covenants, Conditions, and Restrictions (CC&Rs), a Tenants in Common Agreement, or an LLC Operating Agreement. Key clauses should include:

 

·      Finances: Define shared financial responsibilities and decision making processes.

·      Maintenance and Repairs: Establish guidelines for maintenance costs, emergency repairs, and renovations (capital improvements).

·      Voting. Specify whether decisions are made by unanimous or majority vote and what happens should the vote become deadlocked.

·      Transfer of interest. Outline procedures for transferring or divesting an ownership interest. This clause might include a right of first refusal for the existing owners, a discounted purchase price, or a payment plan provision.

·      Dispute Resolution. Agree on methods for resolving disputes, such as mediation or arbitration, and include a provision for attorney’s fees.

·      Termination of the agreement. Include a provision for amending or terminating the agreement.

 

Establishing the Cabin Rules

In addition to the Master Agreement, the Cabin Rules provide specific guidelines for day-to-day use and management. These rules can be updated as needed and cover areas such as:

 

·      Seasonal opening and closing

·      Sleeping arrangements

·      Number of guests and associated expectations

·      Holiday schedules

·      Maintenance tasks

·      Other practical considerations

 

Conclusion

Shared ownership of a lake property can be a joy rather than a burden with proper planning and communication. By choosing the correct method for transferring ownership and creating a Master Agreement and Cabin Rules, you can ensure that your family’s lake property remains a source of happy memories for years to come.

This article is intended for educational purposes and not legal advice. For personalized legal advice and assistance in drafting the necessary documents, our office at Fennemore is here to help. Enjoy your summer at the lake, and let us handle the legal details to keep your family cabin a place of fun and relaxation.