Few things are as uniquely Minnesotan as the idea of a lake home or cabin. They’re places for families to gather and make memories, to fish and swim and sit around a campfire, or simply to unplug from an otherwise chaotic life. That’s exactly what Alan Anderson’s father and his friend had in mind in 1953 when they bought a place together on Lake Francis less than an hour west of their homes in Owatonna, Minn.
The two men — A.J. Olson and F.C. Anderson — had grown up together in Cloquet, where they played football and were Eagle Scouts. They went to medical school together, and both were drafted to fight in World War II. Each man returned from the war and settled into a profession as a doctor. Not long thereafter, they became business partners, lived next door to one another, and each raised five children.
For decades, the two men had a simple agreement about how their families would use the cabin. As they aged, they realized it was time to turn over the cabin to their children, and in 2005 they executed a quit claim deed, or legal transfer, essentially giving it to their nine children (one had died as a young adult). They all were aware of instances in which siblings disagreed on what should happen to a cabin after their parents died, or of arguments undermining everything cabins are supposed to be about, said Anderson, who lives in Northfield.
“We decided we needed to come up with an operating agreement, and we needed to try to imagine everything that could possibly go wrong and disputes that could arise,” he said.
They created a limited liability company (LLC), of which each is a member. They then drafted a seven-page operating agreement that includes provisions ranging from contributions, how meetings will be conducted, and what will happen upon sale of the property. The nine children sought to address issues before they arose and before there were strong emotions involved.
That was a good move, according to Mark Peterson, an attorney at Moss & Barnett law firm in Minneapolis, who helps clients manage and transition family owned properties.
“The LLC really forces people to sit down and think through what it is they are going to do, and do so at a point before specific issues of contention arise,” Peterson said. “You reach an understanding during the calm, rather than trying to address it when the storm is there.”
A major point of contention, for example, could be related to making improvements. Or about one person wanting to terminate his or her ownership and cash out the equity. In Anderson’s case, the group decided people could quit paying their dues and walk away, but they wouldn’t be entitled to anything else because nobody has an equity status in the partnership. They also decided that if the cabin were sold outside the family, all proceeds would go to the Olson-Anderson Owatonna Clinic Foundation. While they maintain the cabin such that it keeps water out and is a pleasant place to spend the summer, they’ve never replaced the original siding or swapped out the wood paneling on the interior walls.
“When people are thinking about improvements, they realize they won’t get their money back from a capital investment,” Anderson said.
As such, ownership under an LLC does require a unique mind-set, he said.
“It’s a group-shared cabin, and if you think about it more in those terms, then you are less annoyed by things not being exactly the way you want them,” Anderson said.
The trust route
As people work on their estate planning, some decide to use a trust, which allows them to pass down their cabins to future generations. If someone establishes a cabin trust that takes effect at his or her death, said Jennifer Ede, an attorney at Dorsey & Whitney, they do not have to change how they operate and maintain the cabin while they are living, but can have some assurance that their wishes will be honored at their death. Transferring a cabin to an LLC during a person’s lifetime, on the other hand, requires some level of upkeep for the LLC, including fees and annual filings. However, it may provide some personal liability protection during the cabin owner’s lifetime if, for example, there is an accident at the cabin.
Some cabin owners also specify that money from their estate be used for cabin-related purposes in order to alleviate burdens on their children. Not only can that make things easier for the kids, but also the owners have some assurance their cabin will be kept up at least for a period of time after their passing.
Peterson owns a cabin, too, and extolled the virtues of LLCs for their simplicity to set up and the way they can be used to address common issues. Still, he urged anyone who owns a cabin to make some sort of a plan to ensure it remains the restful and peaceful place it was meant to be.
“Whether you set up an LLC or have a trust, when you have joint ownership among family — particularly among the second and third generation — everyone should have a written document that lays out how it’s going to operate,” he said. “When mom and dad are out of the picture, a lot of unspoken frustrations and what have you can come out. And that’s really tragic.”
For the Anderson and Olson families, the time spent drafting the operating agreement and creating the LLC was important, even though they’ve never really had to make use of it.
“We’re 10 years into it, and all nine families are still involved in paying their dues,” Anderson said. “It’s more of a worst-case scenario. We haven’t had to refer to it very much at all.”
Joe Albert is a freelance writer from Bloomington. Reach him at email@example.com.