The Act defines residential property as any real property that is a detached home or similar building which contains no more than three dwelling units, as well as semi-detached homes, rowhouses, or condominiums, and vacant land zoned for residential and mixed-use. Thus, the legislation does not explicitly ban the purchase of larger buildings with multiple units.

A key parameter in the Act’s accompanying Regulations notes that this legislation will only apply to properties located in a “Census Metropolitan Area” or a “Census Agglomeration.” A census metropolitan area has a total population of at least 100,000, with at least 50,000 living in its core, while a census agglomeration has a core population of at least 10,000 people, based on data from the previous Census of Population Program. Thus, homes and recreational properties, such as cottages and lake houses, located outside of Census Metropolitan Areas or Census Agglomerations will not be considered residential property and not subject to the ban.

The Act further lays out exceptions to specific categories of individuals who will be allowed to purchase residential properties in the two-year period. There is no ban on the purchase of property by Canadian citizens, persons registered under the Indian Act, and permanent residents. Refugees, buyers with Canadian spouses or partners, and temporary residents studying or working in Canada, all meeting specific criteria, are not subject to the ban. Additionally, the new legislation will not affect individuals who acquire an interest or a real right resulting from death, divorce, separation, or a gift.

Banned individuals who violate the prohibition may be subject to a penalty of up to $10,000 CDN and may be forced to sell the property purchased, “receiving no more than the purchase price paid.” In addition, those who knowingly assist a non-Canadian in “contravening the prohibition” may also be subject to the fine.

The prohibition does not apply if a non-Canadian becomes liable or assumes liability under an agreement of purchase and sale of residential property prior to January 1, 2023.

To learn more about how this may affect your potential of purchasing of a home or vacation property in Canada, please contact us.

This alert serves as a general summary and does not constitute legal guidance. Please contact Mark Kellogg with any specific questions.

If you own a cottage in Michigan, our Cottage Law team can help you think through the issues and take the actions necessary to create a cottage plan.

A cottage plan usually addresses the concerns through the creative use of a limited liability company (LLC) or a trust to own the property. Properly crafted, the LLC’s operating agreement or a trust agreement covers such topics as:

• Who can own a share of the cottage
• Who pays to maintain it (and what happens if they don’t)
• Who gets to use it and when
• How to make future decisions regarding the property
• How to respond when an owner wants to get out of the arrangement for any reason

Ready to secure your cottage for the enjoyment of future generations? Here’s how to move forward:

1. Contact Mark Kellogg, an experienced cottage law attorney, to set up a consultation to discuss your objectives. You can reach Mark at mkellogg@fraserlawfirm.com or 517.377.0898.
2. Once your objectives are clear, Mark will work with your family to create a cottage plan that addresses your needs.
3. Upon completion, the cottage plan will be implemented. We will handle all the details so you will have peace of mind knowing that your family will be able to enjoy the family cottage for generations to come.

We look forward to working with you. If you have any questions, please feel free to contact Mark Kellogg.

As summer winds down, the second-home market continues to heat up in Michigan. One of the issues many second-home owners face is determining the best way to keep a family cottage in the family for generations to come. In this series on cottage planning in Michigan, we are addressing that very issue.

In part one, we discussed the reasons why a cottage owner may want to develop a cottage plan (including Michigan’s complicated real estate tax framework). This article deals with the mechanics of cottage succession planning in Michigan—specifically, utilizing a limited liability company or trust structure to allow a cottage to be used and enjoyed by future generations in an organized way that helps reduce the risk of family disputes, thereby increasing the likelihood that the cottage will be part of the family for years to come.

What is a Cottage Plan?

A cottage plan is an agreement that describes how a cottage will be shared, managed and passed on to future generations of family members. Cottage plans typically cover a range of issues that can impede the succession of a cottage if left unaddressed, including:

• Who should own the cottage?
• Who should manage it?
• Who should pay for it?
• What if an owner wants/needs out?
• Who gets to use it?
• How should use be scheduled?

By working through these issues in a cottage plan, an owner (or “founder” in cottage-planning lingo) can achieve various goals that are commonly shared by those who desire to keep the cottage in the family. Those goals include:

• Keeping the cottage in the family for future generations so that it can continue to serve as a gathering place for extended family
• Giving children equal shares of the cottage (while avoiding “trapping” an inheritance in the cottage)
• Keeping interests in the cottage out of hands of in-laws and creditors
• Reinforcing family interests versus any one individual’s interests

An effective cottage plan can and should also address the objectives of the family members (or “heirs”) who will enjoy the cottage beyond the owner’s lifetime. Such objectives include:

• Protecting the cottage from a divorce
• Developing decision-making structures and control mechanisms
• Developing consequences for failure to abide by rules—financial and behavioral
• Developing a fair, flexible scheduling system
• Provide an exit strategy where desired or necessary by providing the ability to sell interests back to family

Cottage Planning Solutions

Most husbands and wives who own a cottage hold title as joint tenants with rights of survivorship, which means that title to the property automatically passes to the survivor on the death of the first co-owner regardless of any provision in a will or trust. Upon the death of the survivor, and in the absence of a cottage plan, the cottage will pass to heirs as tenants in common.

A tenancy in common can be problematic for a number of reasons, including:

• Each tenant in common (“TIC”) has a right to partition
• Each TIC may use the cottage at any time
• A TIC may transfer his interest to any person at any time – including his/her spouse.
• A TIC does not owe rent to the other owners for using the cottage.

A better approach, which helps avoid the issues that often arise when heirs are tenants in common, is to have title to the cottage held either by a limited liability company (“LLC”) or a trust. Under an LLC structure, a management committee, which serves a function similar to a board of directors, is formed to manage the cottage’s affairs. With a trust, co-trustees are appointed to make decisions. In either case, if the family and entity is structured by branches, it is advisable to have one representative from each branch of the family involved in decision making.

Through the cottage planning process, the founders decide who may be a “member” (under an LLC) or beneficiary (under a trust). Virtually all cottage plans restrict participation to lineal descendants of founders, which ensures the cottage remains in the family—in other words, preventing in-laws from becoming members or beneficiaries.

One of the primary advantages of having a cottage plan utilizing an LLC or trust structure is that it provides a mechanism for transferring membership or beneficial ownership interests. Plans typically include a “put option” which requires the LLC or trust to purchase the interests of members or beneficiaries who want to sell their stake, and a “call option” that allows for the forced buy-out of difficult members or beneficiaries. Valuation and payment term guidelines for purchases are defined in the plan. This provides a predetermined exist strategy for those who do not wish to participate in the cottage or those who do not or are unable to contribute their fair share to cottage costs and expenses. The predetermined terms established for the buy-out provisions offer the opportunity for a graceful exit.

Plans also address issues related to expenses, such as taxes and maintenance, for the cottage. Expenses are typically allocated according to a predetermined sharing ratio among the members and beneficiaries. Often, an annual budget is prepared and an annual assessment is determined at the beginning of each year or season. Failure to pay expenses can be dealt with through an escalating series of sanctions, from the imposition of late fees and interest all the way to the forced buy-out of the delinquent member or beneficiary.

In many instances, founders choose to offset the ongoing expenses of a cottage by establishing an endowment, which is a dedicated sum of money for a specific use. For example, a $500,000 endowment invested at a five percent rate of return will create a pre-tax return of $25,000 per year, which is a sum sufficient to operate many cottages. The endowment may be held and managed by a bank trustee or by the LLC. If a cottage is sold, the endowment distributes to the founder’s descendants. One way to fund the endowment is to purchase a “second-to-die” life insurance policy.

Finally, a cottage plan typically addresses issues related to the use of the cottage—that is, who can use the cottage at any given time. Two common approaches include a “rooming house” structure in which any member or beneficiary can use it any time, and a “time share” structure in which members and beneficiaries are allocated specific time slots for use.

Take Action to Create a Cottage Plan

There are significant advantages to having a cottage plan that utilizes an LLC or trust structure. There is no single option that is best for all families, so it’s important to consult with an experienced cottage law attorney to determine what option is right for you. With a bit of planning, you can help ensure that your cottage will be a source of enjoyment for your family for generations to come.

If you have any questions about planning issues for your cottage in Michigan, please contact Fraser Trebilcock shareholder Mark Kellogg.

Fraser Trebilcock attorney Mark E. Kellogg is a certified public accountant, and has devoted over 30 years of practice to the needs of family and closely-held businesses and enterprises, business succession, commercial lending, and estate planning. You can reach him at 517.377.0890 or mkellogg@fraserlawfirm.com.

The family cottage is a place for fun and relaxation in Michigan. It’s where different generations gather and form lifelong memories. When purchasing a cottage, it’s often the intent of the owner to pass the cottage on to future generations to enjoy. Unfortunately, that vision may not become a reality due to challenges such as high property taxes, differing objectives among heirs and resulting family disputes that result in the cottage being sold upon the owner’s death. Common issues that prevent the passing of a cottage to future generations in Michigan can be addressed through careful cottage succession planning.

Michigan is a Booming Market for Second Homes

When the COVID-19 crisis hit, many predicted calamitous economic consequences. With record-high unemployment and a plunge in gross domestic product, there has been a severe plunge in economic activity across the United States. However, few anticipated that a mere four months after the pandemic took hold in Michigan and across the country, we would see record home sales driven by low mortgage rates and flight from dense urban areas.

The Wall Street Journal recently reported that in New York City the luxury real-estate market has been delivered a “stunning gut-punch” due to the COVID-19 crisis. Meanwhile, the Detroit Free Press reported that Michigan’s “Up North” cottage market has “become a red-hot market this summer, and not just despite COVID-19, but perhaps because of it,” with sale prices up as much as 10% from a year ago in some areas.

With plentiful access to fresh water and beautiful natural landscapes, Michigan has always been a desirable place to own a cottage. In fact, the National Association of Home Builders estimates that 50 percent of second homes in the United States are located in eight states, with Michigan being one of them.

With so many second homes in Michigan, it’s natural that there is a great deal of interest among homeowners in succession planning issues that allow second-home cottages to remain within their families for generations to come. The goal of cottage succession planning is to set up legal ground rules that provide the best chance to keep a cottage in the family and prevent intra-family squabbles that may arise in the absence of a plan.

Reasons to Develop a Cottage Succession Plan

There are a number of reasons why a cottage owner may want to develop a cottage plan, which usually addresses concerns about successorship through the creative use of a limited liability company (LLC) or a trust tailored specifically for ownership of the cottage property. Here are ten common reasons why a cottage plan may be advisable.

1. Prevent a joint owner from forcing the sale of the cottage through an action for partition
2. An alternative to allowing common law rules to dictate how the cottage operates
3. Prevent transfer of an interest in the cottage outside the family
4. Protect owners from creditor claims
5. Establish a framework for making decisions affecting the cottage
6. Provide sanctions for nonpayment of cottage expenses
7. A vehicle for an “endowment” (money set aside to fund cottage expenses)
8. To require mediation or arbitration of family disputes
9. Allocate control of the cottage between or among generations of owners
10. May help delay (or avoid) the uncapping of Michigan property taxes

Michigan Real Estate Taxes

Cottage succession planning in Michigan has unique aspects due to its complicated real estate tax framework. Pursuant to Proposal A, a 1994 amendment to the Michigan Constitution, a property’s annual assessment increase is “capped” and cannot exceed the lesser of five percent or the rate of inflation during the preceding year. However, when ownership of property is “transferred” to a new owner, the property value is “uncapped” for purposes of calculating property taxes, and the value is adjusted to the current fair market value.

Prior to Proposal A, it was common for cottage planning to involve the use of a limited liability company (“LLC”) to enable successive generations to use and manage a family cottage. But the Michigan legislature, in revising real property tax laws to address Proposal A, did not include LLCs as a means of “transfer” that would prevent the uncapping of property taxes.

Pursuant to Michigan Compiled Laws, Section 211.27(a), transfers of ownership do not include (and therefore do not give rise to uncapping) the following:

• Transfers to a spouse or jointly with a spouse
• Transfers to a “qualified family member”
• Transfers subject to a life lease retained by grantor.
• Transfers to a trust if the settlor, settlor’s spouse or a “qualified family member” is the present beneficiary of the trust
• Transfers from a trust, including a beneficial interest in a trust, to a “qualified family member”
• Transfers from an estate to a “qualified family member”

A “qualified family member” includes:

• Transferor
• Spouse of the transferor
• Transferor’s or transferor’s spouse’s:
  • Mother or father
  • Brother or sister
  • Son or daughter, including adopted children
  • Grandson or granddaughter

The Trust Approach to Cottage Succession Planning

Although the manager and member structure and the limited liability protection afforded LLCs make them the ideal entity to be used for cottage succession planning, in Michigan, the favorable treatment associated with trusts as a means to prevent the uncapping of real estate taxes upon transfer of a cottage to the next generation, have resulted in trusts being the entity of choice in Michigan. Part two of this series will discuss in further detail the aspects of using a trust in cottage succession planning in Michigan allowing the cottage to be used and enjoyed by future generations in an organized way that helps reduce the risk of family disputes and accordingly increases the likelihood that the cottage will be part of the family for generations to come.

Stay tuned for part two in this series in cottage succession planning. In the interim, if you have any questions about planning issues for your cottage in Michigan, please contact Fraser Trebilcock shareholder Mark Kellogg.

Fraser Trebilcock attorney Mark E. Kellogg is a certified public accountant, and has devoted over 30 years of practice to the needs of family and closely-held businesses and enterprises, business succession, commercial lending, and estate planning. You can reach him at 517.377.0890 or mkellogg@fraserlawfirm.com.

You can view the full article by clicking HERE.

Mark E. Kellogg’s breadth of knowledge and experience gives his clients unique insight into the special considerations associated with the cottage law practice. If you have any questions, you can reach out to Mark at mkellogg@fraserlawfirm.com or (517) 377.0890 for assistance.

1. Prevent a joint owner from forcing the sale of the cottage through an action for partition.
2. An alternative to allowing common law rules dictate how the cottage operates.
3. Prevent transfer of an interest in the cottage outside the family.
4. Protect owners from creditor claims.
5. Establish a framework for making decisions affecting the cottage.
6. Provide sanctions for nonpayment of cottage expenses.
7. A vehicle for an “endowment” (money set aside to fund cottage expenses).
8. To require mediation or arbitration of family disputes.
9. Allocate control of the cottage between or among generations of owners.
10. May help delay (or avoid) the uncapping of Michigan property taxes.

These are the basics, but just as each family is different, each agreement can be tailored to fit specific needs.

Mark E. Kellogg’s breadth of knowledge and experience gives his clients unique insight into the special considerations associated with the cottage law practice. If you have any questions, you can reach out to Mark at mkellogg@fraserlawfirm.com or (517) 377.0890 for assistance.

Attorney Mark E. Kellogg

The Law Offices of David S. Fry, PLC and Fraser Trebilcock are pleased to announce that as of January 1, 2019, the Cottage Law practice of David S. Fry has been transferred to the law firm of Fraser Trebilcock with attorney Mark E. Kellogg of that firm as David’s designated successor.

Over the last several months, David and Mark have worked closely together to make the upcoming transition as smooth and seamless as possible. Mark will continue the Cottage Law practice with the same skill, dedication and knowledge that you have come to expect from the Law Offices of David S. Fry, PLC.

Fraser Trebilcock is a Lansing based law firm with additional offices in Detroit and Grand Rapids, and Mark and the firm welcome this opportunity to expand their succession planning practice in the specialized area of Cottage Law. David will assume the role of Of Counsel to Fraser Trebilcock as of January 1, 2019, for a period of time during the ongoing transition of David’s Cottage Law practice.

Bottom line, the lake house had to be sold.  Joe said his friend’s forty year old children cried the day they sold the cottage.  Instead of a 25 minute drive from town to the lake house, now it is an 8 hour drive to spend their vacation in a rented condominium once a year.  The grandchildren and every generation hereafter will never know the family lake house.  Our client and I agreed there is no way to quantify the damage done to his family.

Families need to work together before it is too late!

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Unfortunately, this is not an unfamiliar story here at the Cottage Law Center.  It is the reason we work with families to structure a cottage succession plan that will help future generations plan and manage their family vacation property in a way that will hopefully avoid conflict and… save the family cottage for generations of enjoyment.