Passing the Family Cabin Outright to Your Children

It is the end of another long week of meetings, traffic, deadlines, and stress. You leave work and set off into the night. The closer you get to your private hideaway, the faster your troubles seem to fade away. There is no better medicine for your worries.

The weekend is filled with laughter, relaxation, and family fun. The hideaway has become a multigenerational meeting place where grandparents, adult children and their spouses, and grandchildren come to play. Perhaps it is a cabin located on Lake Vermilion, Burntside, or Pokegama. No matter where your destination is, there sense peace and happiness.

Your goal is to pass this property on to your family. Perhaps, for both nostalgic and financial reasons, you want to keep this vacation home in the family for future generations. However, passing on a cabin without a proper succession plan can cause unintended consequences. For example, consider if your three children inherit your cabin outright, all three are listed on the deed. As life often does, it may throw in a curve ball. Perhaps, one child loses her job, can’t afford her share of maintenance costs and want to sell out her share. But, the other children are not financially in a position to buy her out. Therefore, the distressed daughter is forced to ask the court to “partition” the cabin. Other words, sell the family hideaway.

This is just a small example of the undesirable outcomes of inheriting or passing on property outright to your children. This outright transfer creates “tenants in common,” which refers to arrangements under which two or more people co-own a parcel of real estate without a right of survivorship. This type of co-ownership allows each co-owner to choose who will inherit his/her ownership interest upon death. In addition, each owner can also individually sell their interest in the property.

Tenants in common can be formed when real estate is left directly to multiple family members in a will, deeds property outright, or in the event that one passes without a will. A reason to avoid creating this type of ownership is the right of each owner to partition. Partition is the right of a land owner to petition the court to sell the property, if the other joint owners are unwilling or unable to buy him/her out.

A trust, a partnership agreement, or LLC operating agreement can address how the each family members’ interests are to be treated in the event of death or divorce, address the inability of one or more owners to afford maintenance, establish how capital improvement are to made (and at whose expense), and more. Take time to make a succession plan, this will help ensure your cabin is there for generations to come.

Shouldn't My Property Taxes Be Going Down?

Property values across the U.S., including Minnesota (and Minnesota lakeshore) have been declining. So, of course, one would expect their property taxes will decrease next year as well. Sadly, a decrease in your property taxes is unlikely to happen. In order to understand why, we have to take a look at how the property tax system in Minnesota works.

Unlike income and sales taxes, which are rate-based taxes, Minnesota's property tax does not work this way. Rather, property tax is a levy based tax. This means that taxing districts, such as cities, counties, school districts and special taxing districts, determine how much money they will need to raise in property taxes in order to balance their budget. The “levy” amount is then used to determine the tax rate which is to be applied to local property. Therefore, a change in the value of local taxable property will affect the distribution of what each property’s share is, but will not likely affect total revenues generated by the state.

Given this levy-based system, there are three basic factors that will determine an individual parcel’s property tax liability: (1) your local levy, the rate your local taxing district(s) decide to impose on property, (2) your parcel’s share to total property tax base, this valuation includes estimated market values, the portion of the value which is taxable, and the class rate (statutorily set), and (3) applicable tax credits, credit amounts which are subtracted from the tax liability.

Finally, the property tax system in Minnesota has a time lag component- the assessment cycle. It typically takes assessors six months or more to take into account new sales, in terms of valuing properties. Additionally, even once they do account for the decrease or increase in value there is another lag of one year or more before those values are used to calculate your property taxes.

This is a very simplified view of property taxes; don’t expect major changes in your tax bill to come quickly. However, that being said, it is worth while to talk to your local assessor about the valuation of your property, this could save you money in the future.