Co-written by: Doria Aronson
(Published in the Laconia Citizen, July 2011)
Summer is fast approaching and for many families that means trips to the family cottage, camp or farm, a place where your family has enjoyed countless hours of fun and recreation over the years. Whether modest or grand, these family vacation properties have special sentimental value to you and your family as a place to share common experiences and foster family traditions. As you enjoy your time with the family this summer many of you will assume that your children, grandchildren and great grandchildren will also enjoy this special place in the future. However, without proper foresight and planning, that might not be the case.
Planning for successive ownership and management of family lake houses, camps, cottages, and farms (or “Legacy Property”) presents many unique challenges and opportunities. Generally, the senior generation desires to preserve the property so that it may be passed down from one generation to the next in an orderly manner. It is important to ensure that tools are in place for the proper management and administration of the property in order to avoid disputes and conflicts among family members. A trust, which we at the McLane Law Firm call a Family Compound Trust, affords the most flexible method for owning, managing and transferring unique family properties.
A well drafted trust has several advantages. Under NH law, trusts can now last in perpetuity. It can restrict ownership of the property to members of the family, thereby protecting the Legacy Property from creditors and unhappy marriages. It will provide a management structure for an orderly decision making process, including formulating annual budgets, calculating assessments, providing penalties for non-payment of assessments etc. Typically, the beneficial interests in the Family Compound Trust are divided into classes representing the separate family groups, with each family group owning Certificates of Beneficial Interest (or “CBIs”), which are similar to shares of stock in a corporation. It is then the CBIs which get transferred from parent to child to effectuate estate planning goals.
Estate Tax Benefits. Legacy Property often represents a significant value in an individual’s gross estate, and if it is lakefront property it may well appreciate at a greater rate than other assets. By creating a Family Compound Trust which holds CBIs, the grantor (the person who creates the Trust) can reduce his or her taxable estate in a number of ways. One option is to take advantage of the annual gift tax exclusion amount (currently $13,000 per individual or $26,000 per couple) and give away beneficial interests (CBIs) to the children each year, thereby slowly reducing the value of the grantor’s taxable estate. Another option is to give away all the CBIs upon creation of the Trust, thus using up all or a portion of the grantor’s lifetime gift tax exclusion (currently $5 Million), but avoiding the future appreciation of the Legacy Property in the estate. With the current depressed real estate market, properties are appraising for much less than they did in past years and therefore property owners are able to use less of their lifetime gift tax exclusion to give away interests in Legacy Property.
Other Benefits. There are many other reasons, other than saving tax dollars, which motivate families to create a structure such as a Family Compound Trust to own and manage legacy property.
Keeping it in the Family: By establishing a written structure, the Grantor can make sure the property stays in the family by providing restrictions on the transfer and assignment of CBIs. Generally, the Trust will not provide restrictions on transfers of CBIs to the descendants of the Grantor. It will, however, prohibit the sale of CBIs to outside parties.
Use, Rules and Regulations: Perhaps one of the most compelling reasons that families create a Family Compound Trust is to ensure that future generations enjoy the property in the same manner they enjoyed the property. When more then one family owns property, disagreements as to its use, maintenance and transfer may arise. The Family Compound Trust is designed to prevent, or at least minimize, such disagreements by addressing the issues clearly in the Trust document.
Expenses and Assessments. Typically each CBI holder is responsible for his proportionate share of the expenses relating to the upkeep and maintenance of the Trust property based on his ownership interest. If it is anticipated that there will be a wide variation in the use of the property by different CBI holders, the trust can provide for unequal assessments to address the inequality of use. For instance, the Trust might provide that capital improvements are paid proportionately based on ownership, but ordinary expenses are divided based on usage of the property. Additionally, the grantor may wish to provide for an endowment for future expenses. How to structure the Trust document as to uses and expenses is ultimately decided on a case-by-case basis, but the advantages of tackling these issues ahead of time are endless.
Trustee. It is important to appoint trustees (and successor trustees) who will manage and conserve the trust property, prepare annual operating and capital budgets, determine assessments and generally serve the best interests of the CBI holders. Any issues relating to the use and management of the property that were not addressed in the Trust document initially can be delegated to the trustees, who have the power to adopt rules and regulations for the everyday use of the property in the future.
As summer begins and your family enjoys gathering at the family camp or cottage, you should consider effective planning to ensure your children, grandchildren and great grandchildren will enjoy your family treasure in the future as you do now.
Doria D. Aronson is an attorney in the Trusts and Estates Department of McLane, Graf, Raulerson & Middleton, Professional Association. She can be reached at [email protected]. Alexandra Breed is a Director in the practice and can be reached at [email protected]. The McLane Law Firm is the largest law firm in the State of New Hampshire, with offices in Concord, Manchester, Portsmouth, as well as Woburn, Massachusetts.