Jay Sachetti joined Jeff O’Brien, partner at Husch Blackwell and Dyanne Ross-Hanson, president of Exit Planning Strategies talked about the market for mergers and acquisitions, exit planning opportunities for companies that don’t end up for sale and how companies can maximize their eventual sale price during an early October panel at the first Upsize on Tap event at Summit Brewing Co. in St. Paul.
When the state Legislature passed a law requiring employers to provide paid leave and safe time for employees, Justin Bieganek started hearing differing details from friends, colleagues and peers.
Nate Albrecht,
EideBailly LLP:
952.918.3516
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www.eidebailly.com
WITH THE START OF FALL, many Minnesotans are preparing the cabin for winter, or getting ready to travel south until spring.
These second residences, vacation properties and cabins are not only a center for family interaction, but can also be a significant asset of the owners. Transferring these assets to the next generation requires careful planning – and not just for legal and financial aspects, but also for emotional and relationship complexities.
Parents usually carry enough clout within the family to resolve disputes about cabin use, as well as handling maintenance and other costs associated with ownership. However, without a clear set of guidelines, these issues can be a source of conflict and animosity among the heirs (the children), after the parents transfer the property.
Have a conversation to clearly understand the parents’ intentions and the children’s expectations. Each party’s answer to questions about the use and purpose of the property can be surprising; however, they can help clarify the ideal transfer mechanism.
The following issues can be significant points of contention:
As easy as these issues may seem to resolve, they can – and will – create some conflict in the future; therefore, establishing a means to resolve unanticipated conflict is also important.
There are a variety of ways to transfer these properties either while the parents are still alive (inter-vivos) or at death (testamentary), and each method has strengths and weaknesses. The three most common methods of transfer have multiple modifications to accomplish specific goals.
1. Direct transfers. A direct transfer can be accomplished inter-vivos as a sale or gift to the children, or as a testamentary bequest in the parent’s will. Direct transfers are simple and ensure the parent’s wishes are met regarding who gets the property.
An inter-vivos transfer can avoid probate and potentially remove the property from the parent’s estate. Additionally, the parents may still play the role of arbiter of conflict and direct property maintenance.
However, a completed transfer changes legal rights and responsibilities, triggering the areas of conflict mentioned above. Also, the parents usually give up legal control, which means the children can sell the property if they wish, even if that is not what the parents envisioned.
Finally, there are tax considerations, such as gift tax on the transfer or sale at below fair market value, income tax on any gain on sale, and the potential loss of income tax gain exclusion for the sale of a primary residence.
2. Transfer via trust. A transfer via trust can also be inter-vivos or testamentary, and can provide more control over how the parents wish the property to be utilized. Typically, the property is transferred to a trust and managed by a trustee according to the terms of the trust.
The trust document provides power and direction to the trustee on how to manage the property.
Structuring this transfer using a Qualified Primary Residence Trust (QPRT) or Grantor Retained Annuity Trust (GRAT) can ‘freeze’ the value of the property for gift tax purposes, while allowing the transferor to continue to use the property for a period of time. Trusts can also avoid probate for property owned in other states, saving money and time for the beneficiaries.
Using a trust to transfer the property gives the parents more control, but trusts also have drawbacks. In Minnesota, the rule against perpetuities prevents a trust from lasting forever, requiring the property to eventually be distributed.
Also, the trust must provide a way to pay for future expenses, possibly requiring additional funding from the parents or children through gifts or rents.
Changing the terms of the trust can be extremely difficult, possibly requiring legal proceedings. Finally, a person acting as the trustee has duties to the beneficiaries, which can expose the trustee to suit by breaching these duties.
As with any transfer, income and transfer taxes should be considered because certain trust transfers may trigger gift taxes, may not move the asset out of the trust’s estate, or may require the parents to pay fair market value rent for use of the property (this isn’t necessarily bad, but can be difficult to explain).
3. Transfer via partnership. The property can also be contributed to a partnership (including various forms of limited partnerships and limited liability companies), and then the ownership in the partnership transferred to the children. This very popular method of transfer provides significantly more flexibility regarding administration.
The partnership agreement can govern who manages the property, how disputes are to be resolved, and how to change the partnership agreement. It can provide some liability protection, can set a method of valuation for buy-out, and can restrict an owner’s ability to transfer (which is an important consideration in divorce or bankruptcy situations).
However, this flexibility comes at the cost of complexity. The partnership is a business, and requires all the regular business formalities, incurring ongoing legal and accounting costs.
Through clear communication and a customized transition plan, the desires of the parents and the expectations of the children can be met. The correct plan can maintain “the cabin” as a connecting point for future generations instead of a conflicting point for heirs, which is usually in everyone’s best interests.
