In this episode, Erin Nicholls and Michael Clear discuss strategies for preserving family legacy assets across generations. With a particular focus on the management and division of interests in real property, such as family compounds and homesteads, Erin and Michael discuss considerations related to carrying costs, ownership structures, bloodline protection, and transfers of interest, while also being mindful of a family’s overall estate planning goals.

Welcome to Future focused sophisticated Estate Planning with Wiggin and Dana. The show where CPAs, insurance professionals, investment brokers, trust companies, CFPs and more confirm up on their understanding of estate planning strategies so they can better guide their clients to make wise decisions with their legacy. Future Focus is hosted by Erin Nichols and Michael Clear partners of the private client services department at Wiggin and Dana. Subscribe to future focused sophisticated estate planning on your favorite podcast platform and share episodes with your clients. And now here are your hosts, Erin and Michael.

So today on future focused, Erin and I are going to discuss a legacy asset that a number of our clients talk to us about and plan around.

Yeah, so it's interesting because a lot of the planning that we do is transfer tax focused or like we've spoken about before, asset protection planning. But one thing we haven't touched on is that type of legacy asset where we're not just focused on the external factors, but we're specifically concerned with the family's desire to preserve an asset and make sure that it is held in a workable structure.

Today what we're going to focus on is some sort of house or cottage or second home or favorite place the family likes to gather.

Exactly.

We're laughing at each other because we've decided not to use cottage, but in reality it is kind of that feeling, right? It there's something at the core of the residents or the location that brings the family back together that sometimes a grandparent wants to preserve for generations. Sometimes a second generation family already owns it and they're trying to figure out how they keep it going along the family lines. So when a client comes in Erin and says, this house is special to the family, let's go easy in the beginning and say mom and dad own it and we'd like to keep it in the family going forward, what are the things that come to your mind?

Yeah, so I would certainly want to get them thinking about two separate issues. The first would be carrying costs of the property. So if they want this home to survive them and to stay in the family, how will the costs of the home be funded? So that's an important consideration and we'll determine sort of a few different choices that we make along the way. And the other is management in use of the property.

Yeah, and both of those questions kind of as we talk to our clients about it, lead us into best planning strategies. So right off the bat carry costs, often clients are using a lot of, we have a number of trusts we might have funding, but if the family wants to preserve it or wants to preserve it for a specific period of time, will often say, let's set aside a specific amount of money, create an endowment or a foundation of funds that can maintain the property on its own for some period of time.

Exactly. And it can be a unique issue, I think, to real property that we're trying to preserve because of how expensive these assets can be to maintain. So thinking of it like an endowment where it can be self-perpetuating and can cover not just real estate taxes and home insurance and things like that, but also the potential need for capital improvements down the line that would really allow the beneficiaries of the property, the people in younger generations to enjoy the home without the need to potentially liquidate it down the line.

Yeah, and for a lot of our clients we think, how do we figure out that number? What is it? So one, if you do it like you had mentioned with the endowment kind of a strategy and you're trying to put away a certain amount of money to create income that can be used to pay for it is one for a lot of clients they'll simply say, look, let me fund it for some period of time. Let me get three years in there or five or 10 years in there to give the family the opportunity to run it, to use it, to have it be paid for so they don't have to worry about it, but not to do it in perpetuity and kind of knowing that some of the other trust structures that they're going to create will help facilitate that. So to kind of get it over the hump from a, you know, yes we are going to keep this in a family perspective.

Absolutely. So we often see then clients sending a cash gift to whatever structure is going to hold the property within their estate planning documents. So I think now might be a great time to introduce some of those structural options for management in use and that can eventually lead us to a point where we can discuss some options for a client that either doesn't want to contribute a cash gift to fund the carrying cost or might not be able to do so. So what entities are you recommending for that

Purpose? Yeah, so if we have kind of top generation ownership, I'll almost always put the asset, the property, the cottage into one trust for the benefit of the family and then use that trust to be the also the recipient of that, the quest, that amount of money that we're putting in there. Often we'll also wrap that entity and maybe the money into a limited liability company. So maybe either during life or at death we transfer the property into a limited liability company that then is owned by a trust afterwards. But for the reason that we talked a lot about in episode one and using trusts for a lot of our beneficiaries, asset protection, kind of management planning, if we have a top generation planning, even if we wrap the property in an LLC, we often still have it owned in a trust structure.

And I think a trust does provide a lot of flexibility with what you can add into it. Sometimes people might think of it as just, you know, holding the property for the reasons we talked about in episode one, but really when you're drafting the trust within your estate plan, you do have the option of adding in language about management of the property or use of the property or even potentially making reference to a side letter that you direct the trustees to that can deal with the home operation.

Yeah. So maybe we take that next perspective and instead of thinking about generation one doing the planning, we look at generation two, so we have, we'll go with easy numbers four siblings that own a family vacation home together. What do you suggest to that group for that planning?

Yeah, so if we're already in generation two, and typically that would happen if mom and dad have already passed away leaving this homestead to the kids in equal shares and we certainly have seen that before in in, in that circumstance, I'm inclined to go right to entity planning. So most often that is a limited liability company. Occasionally we see people favor limited partnerships, but using that business entity structure allows the siblings, the four of them to each contribute their share of the home to the LLC in exchange for units in the company. And the LLC then will specifically lay out in a much more traditional way than a trust would the governance of the property. And that can really help dictate voting ability when it comes to decisions about capital improvements or who's going to use the property when and important considerations like that.

Yeah, I think we look at that LLC ownership as any other business agreement where the owners are coming together to decide how it's going to be managed and disposed of. And that agreement is going to hopefully highlight a number of things. I think first transfer restrictions to limit who can own the property. So one of the owners can gift or not gift, is it staying in the bloodline? It can outline use of the property, probably more important. It can outline how they are going to pay for it, how they are going to share in expenses. And I think whether it's we're talking about an analysis or a trust, we also have to consider how do people get out? Like what sort of buyout restrictions or buyout processes are we going to put in place? Especially when you already have that second generation in there with ownership laying it out so they can, when we pass it on to the third generation, if somebody wants in some sort of a process, cause inevitably a child or a grandchild is going to live in California, nowhere near it and not want a lot of use and just see it as an asset to kind of figure out how do they get away from it.

Right. And that's a great point because I think in many ways then the LLC operating agreement, of course I'm using LLC here, but it you could substitute any business entity, those provisions will mirror any type of business agreement where you're laying out permissible transferee of an interest in the exact process that an owner has to go through. So it's not uncommon that an owner looking to sell his or her interest would first have to offer up the interest to the other members. There are often terms provided that the company would be forced to purchase the interest if none of the other members would, and it would outline the purchase price and how to determine it and what the payment would look like, like a promissory note if the company doesn't have a lot of liquidity.

Yeah, I think that's kind of the beauty of using that business entity structure there because each family can lay out the ownership and the governance as they wish. And also the transfer pieces, given an example, we worked with a family where, um, third generation owned the property and multiple family lines, right? So effect of four family lines were already in ownership in in different generations and they wanted to provide a mechanism where if a sibling wanted out, the other siblings had the first bite at the apple and they also wanted to use that same mechanism to make sure each of those four family units had a say at kind of the management of it. So the LLC structure provides that flexibility for us to create that.

Absolutely. And the other thing that we worked on in that particular situation and that you touched on a couple of minutes ago was a mechanism to fund the carrying costs. So often when we're planning with G2 or G3, we don't have that pot of money that we talked about either sort of the endowed funds or the bequest to get the property up and running within the first few years after mom or dad's death. So in that instance, how do you ensure that the carrying costs are funded and that they're funded in a way that's fair to all of the owners? So in that way we very much do structure it like capital calls that you would traditionally see with businesses.

Yeah. I mean you can have as much variety there as is necessary to meet the family's goals, right? So sometimes if you got four owners and everyone has 25% and it costs $10,000 a year to run it, everyone kicks in $2,500. And then our agreement has to say, well what happens if somebody doesn't want to pay this year? What's the downfall there? Sometimes they can't use the property that year. Sometimes maybe that triggers they get bought out, there's different ways to deal with the non-payment on the flip side, maybe they charge it by use and they say, look, it costs 10 grand to run it, who wants to use it this year? And those people who want to use it pay for it and the people who don't pay simply just don't have to pay in. Right. So you can meet the family's goals with planning by that agreement.

Absolutely. Yeah. So the flexibility is certainly there, like you said. And outlining the consequences for members in default is an interesting exercise and it very much is client dependent and what they want and how much harmony there is among the owners. Yeah.

So let's go back up. Let's go back to general one, right? So the parents want to leave this asset and I think that's what we communicate to them is like, look, we are trying to create a structure now where we set the baseline, the trust is going to own it or each family line is going to own it and we get to set the baseline by which they get to make decisions as opposed to when that next generation comes together, they have to agree on it. If mom and dad pick the planning, mom and dad get to pick it, which is creates an interesting dynamic. Sometimes it's an opportunity to educate family members about how the property works, how you're going to maintain it, and sometimes, you know, mom and dad just want to create that system easier to create at the top level than it is when you have multiple levels of ownership.

Absolutely. The fewer the people involved in the decision making, the easier. And it's interesting though because although it may be easier to plan at, you know, generation one, we often do have situations where the client's expectation for future use of the property doesn't match what the future generations will want to do with the property. So that does touch on then the importance of not just buyouts of interest, but really how the next generations would go about liquidating the property.

Yeah, and I think that, you know, whether we put this into the trust structure or simply into an LLC structure, that buyout piece is an important conversation, right? So how are we going to value the property? Are we going to discount the value of the property? And then how is somebody going to pay or they have to come up with all of the money upfront, are they going to be able to use some sort of a promissory note to pay it or all things that come up in that conversation.

It's certainly a fun topic for us. It's unique when we have these legacy assets, it allows us to sort of introduce the topic of, you know, this sort of business planning and management structure for our clients, which is always helpful. So certainly it's something that all advisors should be prepared to discuss with their clients.

Yeah, and it's a fun topic, right? So you have a client who wants to protect their assets or wants to protect a particular asset for the future use of the family. How do we do that? How do we structure it? And also as we talk about educating kind of that next generation, it plays a nice piece in there.

Absolutely. Well, I think that probably leaves us in a good position to end this episode. It teed up for more fun and interesting topics to discuss in future episodes.

Yeah, and we didn't try to do a deep dive in every aspect of planning for a family cottage or piece of property, but to hear some of those considerations and some of the options, I think in closing it out, you know, clients often say, well, what do people do? And we have those conversations about their goals and expectations to see what they want because we're going to be able to create that strategy for them to protect that family legacy asset.

Absolutely. We can make it happen. Whatever the goal, we can make that happen.

Yeah. Well thank you Erin. It was enjoyable having this conversation again today.

Thank you. Please join us next time and in the meantime feel free to share the podcast and to subscribe.

Thank you for listening to Future focused sophisticated estate planning, hosted by Erin Nichols and Michael Clear partners of the private client services department at Wiggin and Dana at Wiggin and Dana. Our aim is preserving the wealth that a family has worked so hard to create and pride ourselves in offering value driven solutions and results. Subscribe to the show on your favorite podcast platform, share episodes with your clients and follow our highly talented, creative and experienced lawyers on LinkedIn for even more Great insight. We'll see you next time on future focused sophisticated estate planning.