As family cabins continue to serve as treasured gathering places, so does the importance of planning for their future. We’re pleased to share the second installment of our guest blog series from law firm Fafinski Mark & Johnson (FMJ), one of Birchwood’s trusted estate planning resource partners. This article explores lifetime transfer strategies and alternative ownership options that can help families thoughtfully manage cabin succession. FMJ’s guidance underscores how proactive planning today can minimize tax implications, preserve family harmony, and ensure your cabin remains a place of connection for generations to come.
By David M. Ness & Daniel J. Wyatt
There is nothing better than cabin season in Minnesota! Earlier this summer, we explored the various ways families can plan for the future of their cabin or lake property after the death of the primary owner (including through a Will, Trust, or Transfer on Death Deed). In this article, we will focus on some options available during the owner’s lifetime to transition ownership of a family cabin in a thoughtful and tax-conscious way.
This article will explore common lifetime transfer strategies, including outright gifts and the use of structured entities like LLCs. Each of these options comes with its own pros, cons, and planning considerations, so it is essential to work with an estate planning attorney to determine the right option for your family.
One of the most straightforward ways to transition cabin property during your lifetime is to make a completed gift of the property to your children. This means giving the cabin (or an interest in it) directly to the next generation and relinquishing all ownership, control, and decision-making power.
The pros of this approach include removing the value of the property from your taxable estate as the owner, potentially taking advantage of today’s high federal exemption, and allowing the next generation to begin building memories and responsibility while you are still living.
However, the cons to consider include the loss of all control. The children will now bear full responsibility for upkeep, property taxes, insurance, and general maintenance. Additionally, there is no mechanism in place to manage use, responsibilities, or disagreements, unless the children voluntarily create one. Moreover, the gifted property does not receive a step-up in basis at the last parent’s death. Instead, the children inherit the original cost basis, which could lead to higher capital gains taxes if the property is ever sold. Furthermore, the property becomes subject to the children’s personal circumstances, including divorces, creditor issues, and financial instability, which could put the cabin at risk.
For families seeking a more structured way to transition cabin ownership while still maintaining control and protecting the property, a Limited Liability Company (LLC) can be a powerful planning tool.
In this structure, the cabin is transferred into the LLC, and the parents retain a small but controlling interest (often 1% or 2% of the membership units). The remaining 98 to 99 percent of the LLC membership interests are gifted to the children during the parents’ lifetime, either all at once or over time using annual exclusion gifts.
This arrangement allows the parents to remove most of the value of the cabin from their estate for estate tax purposes while retaining control over major decisions (through voting rights or the manager role). Plus, the cabin is protected from certain risks, such as divorce or creditors of the children, since the LLC can be structured to restrict transfers of membership interests and define how the property is used.
Many Cabin LLC structures also include a “cabin fund,” which is a pool of money contributed by the parents either during life or at death. This fund is intended to cover the costs of maintenance, repairs, property taxes, insurance, and other ongoing expenses for a defined period, often several years after the parents have passed. The goal of a cabin fund is to ease the financial burden on the next generation during a time of transition and reduce the likelihood of early disputes. Without a cabin fund, a child who is less interested in the property or simply unwilling or unable to contribute financially may push for a quick sale just to eliminate the ongoing responsibilities. By covering expenses in advance, the cabin fund gives the children time to adjust to shared ownership, assess their long-term goals, and make decisions about continued use or possible sale of the property without immediate financial pressure. Most agreements still require unanimous or majority consent among the children before the cabin can be sold, but the existence of a cabin fund provides the necessary breathing room for thoughtful collaboration rather than rushed decisions driven by cost concerns.
However, keep in mind that with outright gifts, the transferred LLC interests do not receive a step-up in basis at the parents’ death. This means that if the LLC or its members sell the property in the future, the gain for income tax purposes may be significantly higher than if a property was sold at the increased cost basis upon someone’s death.
Choosing between gifting the cabin now or waiting to pass it at death involves a balancing act between estate tax planning and capital gains planning. A lifetime gift reduces the size of the taxable estate and may help avoid estate taxes, especially in Minnesota which currently levies an estate tax on any estate valued over $3 million. But it may come at the cost of higher income taxes in the form of capital gains for your children down the road.
For many families, the best path forward involves a conversation with a qualified estate planning attorney and tax advisor who can help tailor a plan that meets your financial, tax, and family goals.
Planning for your family cabin involves more than just naming a beneficiary. Effective planning requires balancing your personal wishes, family dynamics, and long-term financial goals. Whether you are considering an outright gift or forming a Cabin LLC, lifetime planning can be an effective way to ensure a smooth transition and long-lasting enjoyment for future generations.
And if you missed Part One of our Cabin Planning series, you can click here to read it. You can also learn more about cabin planning options in a recent episode of the FMJ Law Podcast featuring David Ness. Please click here to listen.
View the original post here: https://www.fmjlaw.com/cabin-planning-part-two-lifetime-transfers-and-alternative-ownership-options/