by Will Holt

Whether it’s a beach cottage, a cabin on the lake, or a family farm, for many people these family properties have been the source of treasured memories for many years.

Surprisingly though, when it comes to estate planning, thoughtful arrangements for the succession of family property is not always a priority. Oftentimes, family properties are left to pass along with the bulk of other assets, possibly with the hope and understanding that the property would remain in the family, but without any specific planning to ensure that happens.

Unfortunately, all too often, once the surviving family members learn the true extent of the accompanying maintenance and expense required, these cherished vacation properties can become some of the most controversial assets for beneficiaries to share due to the differing interests and personal circumstances of each beneficiary.

So, what can owners do during their lifetimes to ensure their hard-earned and beloved properties are preserved and well-managed for future generations to enjoy? The establishment of a family limited liability company during the owner’s lifetime has become the preferable ownership model for family properties because of the structure and flexibility offered as discussed below.

n Perpetual Existence and Continuity of Ownership—One of the biggest problems resulting from family properties owned through traditional forms of joint ownership is that the property remains open to the risk of an owner seeking to partition the property or attempting to force a sale of the property to effect a buyout of such owner’s share. However, by using an LLC to own property, family members will merely receive an ownership interest in the LLC, as opposed to any ownership in the property itself, so the ability to seek partition is eliminated.

n Structured Succession of Ownership and Control—Ideally, the LLC should be established by the original owners of the property with input from the family members on the terms of the operating agreement. After forming the LLC, the ownership interests can be transferred to the succeeding family members during the original owners’ lifetime (over a period of time if necessary to take advantage of gift tax annual exclusions and minority and marketability discounts), or after the death of the survivor of the original owners. The original owners can hand select the family members they want to become members of the LLC and define the structure for how ownership is to pass through successive generations.

n Separate Management and Ownership—Because ownership and management of an LLC can be separate, the original owner can continue to manage the property throughout their lifetimes. Ownership interests can be transferred to the younger generation during the life of the senior generation, or upon the death of the senior generation.

n Potential Tax Benefits—If ownership interests in the LLC are transferred from the original owner during the owner’s lifetime, such transfers are subject to federal gift tax law. However, by using the gift tax annual exclusion amount (currently $13,000) and lifetime exclusion amount (currently $5 million), depending on the value of the property, one may be able to avoid paying any gift tax.

WILL HOLT is an attorney at Kaufman & Canoles, where his practice focuses on estate planning, business law and real estate matters. He was raised in Hunterdale and is a graduate of the College of William & Mary’s Marshall-Wythe School of Law. Holt can be reached at wlholt@kaufcan.com.