Home
Knox Law Institute
Publications
How to Keep the Family Slice of Heaven With Peace

How to Keep the Family Slice of Heaven With Peace

Posted on November 20, 2024

Authors: Kenzie P. Ryback and Thomas C. Hoffman, II

Originally published in November 2024

This article has not been updated for current law since the date of its posting on the website. This article is not intended to provide any legal advice. Please seek advice of your professional council.

Any U.S. federal and state tax advice contained in this communication is not intended or written by the Knox Law Firm to be used, and cannot be used by you, for the purpose of: (i) avoiding penalties under the Internal Revenue Code that may be imposed upon you, or (ii) promoting, marketing, or recommending to another party any transaction or matter addressed herein.

The increased wealth of Baby Boomers and later generations has led to more investment in family lake houses, hunting camps, cottages, and other family properties, commonly referred to as “their little slice of heaven” (hereinafter, the “Treasured Property” or “property”). How these properties are preserved for future generations (often with multiple children and grandchildren) has become a more common conversation and concern for estate planning clients. There are many ways to approach the subject, but the biggest question is: just because you can, should you retain the Treasured Property? Secondly, will the future generations get along well enough to preserve the “family” part of the family compound?

Anything other than the senior family generation living indefinitely to manage the property as they do “now” is going to be significantly less than perfect. We will provide an overview of a planning technique for circumstances when the client insists upon transferring the family’s Treasured Property to a trust for current and future generations. We will review mechanisms future generations may deploy to help them make decisions in a diplomatic and structured fashion, in hopes the family can continue to enjoy the property. We always emphasize to our clients, if they are not immortal (haha) the best approach is to have one family member own the property and to be a “benevolent ruler.” If the benevolent ruler option is not available, the rest of this article discusses options for managing the Treasured Property.

Introduction to the Family Real Estate Trend

Most people either know someone or they themselves have a Treasured Property where they can slip away from the craze of the normal day-to-day and enjoy a nice weekend alone or with their family. What they say they “own” isn’t always legally theirs, but in reality it is that person’s parents’ property.

We have seen an “epidemic” of clients who want to preserve their Treasured Property so current and future generations may have the opportunity to enjoy the property and make life-long memories as the senior generation has been blessed to do.

Everyone trusts and loves their children, and time and time again we hear “my children get along great, I am not worried about them disagreeing on these issues.” Unfortunately, that is easy to say when the actual owners of the property, the matriarch and patriarch, are still here acting as the arbiter or the superior decision-maker. The parents forget that the kids never had a choice in the management of the property, so there was little potential for squabbling – it was all fun and no responsibility.

Keeping consistent with our general philosophy of planning for the worst and hoping for the best (rather than the other way around), we have worked hard to develop some guidelines for dealing with management of the properties for the children and future generations. With any luck, the guidelines and bylaws will collect a heavy layer of dust because the future generations will operate in a state of happy bliss and simply manage their property without concern.

However, it would be irresponsible to assume that will happen because, frankly, it often does not. The guidelines in trusts and bylaws provide a framework to fall back on if and when tension arises. Knowing there is a structure to deal with issues generally has the positive side-effect of keeping “everybody’s mind open and reasonable.” The type of planning we focus on in this article is not for every family. There generally needs to be a material contribution to the trust in terms of value of the Treasured Property and typically, liquid assets to manage the trust and pay for expenses.

The ideal client is someone that has the funds available that would allow them to transfer the real estate to the trust (the “Family Property Trust”), have sufficient liquid assets that can be both invested and used to maintain the property for the foreseeable future, and still have enough to cover taxes and expenses generated by the estate upon the client’s death. If you start to question whether the real estate will need to be sold to generate liquidity, then this isn’t the right plan.

Not only does the matriarch and patriarch have to have the “buy-in” but the children have to “buy-in” (and it would be helpful if those children’s spouses have to “buy-in”) to the idea as well and be willing to participate. This should not be a decision made solely by the senior generation, this should be a team approach. It really only works if the family is very involved in the planning process, and thus have “skin in the game.” If the rules and regulations are passed upon unilaterally, the family, after the matriarch and patriarch’s deaths, will be less likely to be loyal to the plan. Loyalty to the plan is a requirement for it to work. Depending on how the Treasured Property is passed to the next generation often determines whether the property continues to be the family’s “little slice of heaven” or “a nightmare on Elm (Knox) Street.”

Family Nightmare Instead of Slice of Heaven

The question becomes, when the matriarch and patriarch are gone, will the peace and harmony amongst the children and the grandchildren stop once the kids are calling the shots? Client walks in and says, “I don’t want to make this complicated, my kids will get along, I will just transfer the property to my eldest, and he/she will enforce my wishes and make sure everyone gets to use the property,” or “trusts are complicated, I am just going to transfer the property to my children equally, they can sort it out.” Cue the nightmare.

Issues with Scenario One:

Your eldest just became a dictator. This will work well if he/she is a benevolent dictator. However, if he/she is solely a dictator, kiss family harmony good-bye, and maybe, with that, holidays together, relationships, etc.
Legally, your eldest is the sole owner of that property: (i) he/she can do what he/she wants, (ii) he/she can sell the property with no restrictions, at any time, (iii) the property becomes part of his/her marital estate and could be part of the divorce settlement, (iv) the property could be forced to be sold to pay for his/her long-term care, (v) the property will be subject to Pennsylvania inheritance tax (if in Pennsylvania), and potentially federal estate tax, (vi) the property can be directed to anyone he/she chooses upon his/her decease, including someone outside of the family (you may like your in-law, but what if your in-law dies, have you considered future former spouses?), and (vii) if he/she doesn’t want his/her siblings there, then the owner can keep them off the property – trespassing.
Your eldest is the only person that is financially responsible for the property. This can create a financial strain. Even if the eldest is also gifted cash for the “maintenance” of the property, there is nothing requiring the eldest to use those funds for that purpose.
The property becomes subject to your eldest child’s creditors.

Issues with Scenario Two:

Do your children take by tenants in common or joint owners with right of survivorship?

If by joint owners with right of survivorship, upon the death of one of your children, the other two, for example, will pay inheritance tax on the inherited 1/3 from their deceased sibling. Your deceased child’s children have no ownership interest in the property, and similarly to scenario one above, they can be ousted from use of the property.

If tenants in common, each child owns an undivided 1/3 interest, meaning the child can transfer the 1/3 interest during their lifetime to whomever they wish, they can transfer the 1/3 interest via their will to whomever they wish, and as a result, all of a sudden, the two living children share a property with their deceased sibling’s spouse that they never cared for or their deceased sibling’s six children. Now if they want to sell, make improvements, they have to get the consent of the spouse, or eight people have to agree.
Outright transfer could ultimately defeat the optimal goal of keeping the family property in the family where there is potential to oust parts of the family or transfer interest to non-blood related family members.
How are expenses and maintenance of the property handled? Depending on where the siblings live, maintenance could end up unfairly landing on the shoulders of one of the siblings. If one sibling uses it more than the other two they could argue that that sibling should pay more expenses, even if they are technically all equally responsible because of ownership.

Having three to four people coming to an unanimous decision can be challenging, but for context, take the following example, going out to dinner with the family. There is usually a great debate around where to go or even what type of food to consider. One of two situations normally arise. The first is that no one wants to decide and the ever so frustrating “I don’t care, it’s up to you” or “I’ll do whatever everyone else wants” comments are circulated, which is a challenging enough problem when everyone says that. Then when someone does pick, there is still at least one person to complain at the end of the night, or “you always pick,” gets thrown around. The second is that everyone wants to decide for the group, and you end up being presented with seven different options and no one is willing to budge.

But if the parents would establish a set of rules for choosing where to eat when the family goes out for dinner, for example, pull names out of a hat or if birthdays fall in different months, the person who’s birthday is in that month gets to pick. Now put that in the context of the third generation of twenty great-grandchildren, each of who has their own family with a spouse and children, attempting to share the family lake house, during the high season with no guidance or structure for decision-making. The question of what color stain to paint the boat launch could become a volatile subject. Having only three or four voices having the decision-making authority starts to sound a lot more enticing.

Family Enterprise Model

The matriarch or patriarch have fond memories of family time at the property watching their kids (and later their grandchildren) grow and enjoy the property. They want their children and future generations to build similar memories, their children want the property to be considered “family property” so after discussing with their attorney the way to accomplish their goals, the attorney and the clients settle on the idea of transferring the property to Family Property Trust.

We spend numerous meetings talking about the pros and cons, what can go wrong, and how those identified areas of concern can be addressed. It is by no means a one size-fits all saran wrapped package that we hand over to the clients. Each Family Property Trust and the bylaws are uniquely crafted to meet the needs of the clients, and we spend most of our time talking with the clients about these issues and what is important to the clients moving forward, knowing and understanding that at some point the passion for the family property may not be as strong as it once was.

The goal of the Family Enterprise Model approach to transferring the family property to a Family Property Trust, is to put parameters in place, bylaws (as more fully described below), that act as a structure for decision-making to help avoid some of the anticipated strife. Although there is no silver bullet, planning to avoid or deal with strife is far better than planning for the best and hoping the worst doesn’t happen.

Family Property Trust

Every parent wants to see the family bond continue and be strong, that is an obvious goal, and a driver for most parents when deciding to put the property into a trust. Very careful drafting is necessary to put the family in the best possible position to accomplish the goal of family harmony. Trusts are supposed to reflect the intention of the Settlors, and as such the provisions of the trust are customized to fit the needs and vision of the Settlors and their families.

Remember, it is crucial the next generation of family members be involved so they have skin in the game with the expectation it will result in them being “loyal to the plan.” I once had a client tell me a plan I thought was fraught with issues would work fine if everyone was loyal to it. I explained to the client, I agreed. However, people are only loyal to the plans they are involved with and have buy-in, not plans that are hoisted upon them unilaterally.

The trust is the vehicle that establishes the rules for how to use the funds, if there is income can beneficiaries receive the income, can the income only be used for the maintenance of the property, etc. The Board of Trustees enforces the rules and administers the trust accordingly. For all family property trusts, the main objectives of the Board of Trustees are to invest the liquid funds (with an advisor) to facilitate growth, pay expenses and taxes, maintain the property, be the arbiter when the families disagree, and determine at what point, maintaining the property is no longer in the best interest of the family, or is no longer sustainable. Later we discuss the ideal candidate for the Board of Trustees.

Establishment of Property Maintenance Fund

How will the trust be financially sustained for several generations? This is one of the main factors in determining whether the Family Property Trust is a viable option for the client.

How much is enough? There isn’t a perfect calculation, and the type of property and the location of the property often dictates what an initial reasonable investment is. Like with any trust, the Board of Trustees would not deposit the funds into a non-income generating account, these funds are meant to be invested to generate income to sustain multiple generations.

Factors to consider:

What are the ordinary expenses on a year to year basis, including lawn maintenance, snow removal, real property taxes, etc.?
In the clients’ lifetime of ownership, how much on average were major expenditures for improvements: driveway paving, roof repairs/replacements, hot water tank replacement, etc.?
Is there anything in the foreseeable future that will need a major repair or replacement?

Trust Expenses v. Beneficiary Expenses: General Rule of Thumb:

If the expense is a carrying expense that does not change because of usage, or improves the value of the property, it is a trust expense.
If the expense can be directly tied to a beneficiary’s use of the property, the trust can pay the expense, but such expenses can also be arranged to be the agreed to responsibility of the beneficiary.
For example, extraordinary use of the property, such as for parties, weddings, and other activities that generate unusual expenses are to be paid by the beneficiary utilizing the property for such purpose.
Alternatively, real property taxes and insurance are expenses that are not tied to any one specific beneficiary’s use of the property.

Capital Expenditures: Additional thought should be given as to whether the Board of Trustees has unfettered discretion with regard to capital expenditures, regardless of type and cost.

Alternatively, should capital expenditure decisions be capped at a certain limit that anything above or outside of the scope could require consent of some or all of the beneficiaries in addition to the Board of Trustees?

Board of Trustees - Centralized Management

Purpose: To maintain a structured system for decision making for future generations

Members: One representative from each initial Family Line (as defined herein).

Why? Avoiding too many cooks in the kitchen.

When property is transferred to a trust for the benefit of the Settlors children and the trust is multigenerational in nature, at some point there will be more than just three (3) (for example) people in a given generation.

What if each of those three (3) people have three (3) children of their own. Second generation now has nine (9) individuals. And then they each have three (3) children. In a blink of an eye, the third generation is comprised of twenty-seven people, some having a large age‑gap, some no longer living in the area. If one child lives out of state and never enjoys the family property due to this distance, is he/she the right person to be making decisions relative to the property? So how do you avoid too many cooks in the kitchen (figuratively or literally)?

Treat the Family Property Trust like a business. Utilize bylaws to set the structure for decision-making and the appointment of a Board of Trustees. In a business, the shareholders appoint the board of directors, and the board of directors appoint officers to make the day-to-day decisions. On a quarterly or annual basis, the shareholders assess the performance of the board.

Structuring the Bylaws

Who are the shareholders that appoint the Board of Trustees?

In a typical scenario, the Settlors children are appointed as the initial members of the Board of Trustees. Each child is typically the first representative of their Family Line. If the Settlors die with three kids, then at all points in time, there will be no more than three Family Lines represented on the Board of Trustees. Even in the third generation that has twenty-seven people. If a Family Line is extinguished, then there will be two Family Lines at all times.

Typically, actions require majority rule or unanimous decisions. Should we redo the kitchen in the house or put in a pool? What color to repaint? How do we organize who can use the property and when? These are all decisions that the Board of Trustees will make, but can delegate to other family members are well, if appropriate.

Introduction to Family Lines

Definition of Family Line: Each of the Settlors’ children are usually defined in our trusts as the Initial Beneficiary of their respective irrevocable trust created by the Settlors for their respective Family Line (“Settlors’ Children” or “Initial beneficiary”).

Each Initial Beneficiary’s “Family Line” shall mean all biological and adopted descendants of the Initial Beneficiary, such terms do not, however, include spouses of the Initial Beneficiary’s biological and adopted descendants.

Thus, each irrevocable trust shall represent such Initial Beneficiary’s Family Line.

If multigenerational trusts are not involved, the same concept still applies.

One Family One Voice Model

Initial Family Line Trustees (Representatives)

The Initial Beneficiary may be the first Family Line Trustee for their family. In some instances, depending on the property, the goals, and the family dynamics, Settlors’ may skip their child and appoint a grandchild to act as the Family Line Trustee.
If the Initial Beneficiary is unable or unwilling to act, the Family Line Trustee will mean the person appointed to represent each Family Line on the Board of Trustees.
For illustration purposes only, during CHILD A’s lifetime, she is the Family Line Trustee for the CHILD A 2024 IRREVOCABLE TRUST AGREEMENT, during CHILD B’s lifetime, he is the Family Line Trustee for the CHILD B 2024 IRREVOCABLE TRUST AGREEMENT, and so forth.

Appointment of Successor Family Line Trustees

The Settlors recognize that times change and the Settlors don’t know nor can they predict the personalities and the capabilities of the future generations. Also, the Settlors want to avoid too much “dead hand control.” So, the Settlors set default rules, but allow for alterations to the default rules.

The following are common “default rules” although these often vary from client to client, and whether simple majority, super majority or unanimous consent is required also varies, but the general framework used is as follows:

Allow the Initial Beneficiary to appoint his/her successor to represent the Initial Beneficiary’s Family Line.
If the Initial Beneficiary does not appoint a successor, then the Initial Beneficiary’s children over the age of thirty (30), by majority vote, can appoint a successor. Such successor, however, must meet certain qualifications.
If none of the Initial Beneficiary’s children are over the age of thirty (30) or are disabled, then a simple majority of the other acting Family Line Trustees, shall appoint a Trustee for the Family Line that has a vacancy in the trusteeship.

Who is Qualified to Act as a Family Line Trustee?

The Family Line Trustee need not be a blood-related family member. However, similar to the “pick your partner” mantra, the Settlors may want to allow the other Family Line Trustees the ability to veto the non-family member choice for a Family Line Trustee. It is supposed to be a Board of Trustees that is directly involved in the management of a family property.

Balancing of strengths and weakness is also important for the Board of Trustees. One person may be great at money management, but would never step foot in the woods. That Family Line Trustee would be able to provide valuable insight on the administrative needs, establish the budget, but may not have an opinion on whether to cut a tree down.

Similar to the “not all people are good test takers,” theory, a person can be a great decision-maker without having the credentials on paper. So it is important to allow an opportunity for the appointment of an individual who may not check all the boxes. What makes sense for a Family Line Trustee will vary depending on the Settlors goals, the type of property, the intended use of the property, family preferences, and/or generation. For example, some families may want (i) minimum or maximum ages for the Family Line Trustees, or (ii) to change how often the Family Line Trustees must be reappointed.

Some criteria to think about include:

Minimum Age or Maximum Age?
Education
Professionalism – must be able to exhibit independence, objectivity, and capable of serving as a representative.
Individual Characteristics – intelligence, self-assuredness, high ethical standard, interpersonal skills, independent, courage, a willingness to ask difficult questions, communication skills and commitment.
Availability
Compatibility – can the individual work well with the other members of the Board of Trustees.
Disability of a Family Line Trustees – should this be defined, does the type of disability matter, or should only disabilities that impact decision-making capabilities be considered? How should this be handled?

As stated above, we don’t want a scenario where “dead-hand control” makes the structure unstainable. The initial structure established by the Settlors is meant to act as a template or an initial guideline, it is easier to evolve then start from scratch. The idea is to capture the intended vision, then adjust from there with each generation.

Use of Independent Trustees or Independent Tie-Breaker Fiduciaries

Some families insist on having an Independent Trustee (someone who is not related or subordinate) as a neutral third-party to participate on the Board of Trustees.

Independent Trustees are normally brought into the conversation when the Settlors create a Family Property Trust for property that is to be used for the sole benefit of one child, and then upon the occurrence of a certain event or events, the Family Property Trust terminates and flows to a trust that is for the benefit of the rest of the family. is the Independent Trustee is a third party neutral opinion that prevents the other Family Line Trustees from becoming dictators and usurping the benefits meant for the intended life tenant.

Independent Trustees are also used as a built in buffer when the Settlors think their children get along and can manage the property, but some part of them hesitates.

A more commonly used technique is the use of a tie-breaker fiduciary. The use of a tie-breaker fiduciary arises when the bylaws or the Family Property Trust requires a majority vote, and we have an equal split because of the even number of Family Lines. The tie-breaker fiduciary is an independent voice that acts for the sole purpose of breaking the tie. The tie-breaker fiduciary meets the definition of an Independent Trustee – someone that isn’t related or subordinate to the Settlors or the beneficiaries of the Family Property Trust.

There are a few different approaches to appointing the tie-breaker fiduciary:

Settlors appoint a tie-breaker fiduciary, who can then appoint his/her successor.
Unanimous consent of the Family Line Trustees appoint a tie-breaker fiduciary.
Each faction appoints a tie-breaker fiduciary, and the two tie-breaker fiduciaries appoint a third and acts as an arbitration panel. This tends to be more cumbersome.

Terminating the Family Property Trust

Reasons for Termination

Board of Trustees determine that maintaining the property is no longer feasible.
Trust structure was too restrictive making the Family Property Trust “un-manageable” (too much ruling from the grave).
Property is sold to a third party or beneficiary and the Family Property Trust no longer serves its original purpose.

Who has the power to terminate the Family Property Trust?

Consent of all beneficiaries? Maybe, but four, five, six generations from now that could mean forty or fifty people that consent would be needed from.
Consent of all Family Line Trustees and an Independent Trustee?
Consent of all or a super majority vote of Family Line Trustees?

If the Board of Trustees decides that the Treasured Property needs to be sold, a right of first refusal can be added to the bylaws. The resulting proceeds would then be split based on the Family Property Trust termination provisions.

Options to consider:

Who has the right of first refusal? The eldest generation? All beneficiaries? Do you start with the eldest generation, then move on to the next generation if no one wants it?
Closed bid or open bid?
Requirement for appraisals if the Board of Trustees votes to terminate the Family Property Trust, or highest bidder?
Can other beneficiaries object to the bid?

Using the Property

Statement of Intention

Ask the Settlors to draft a statement from their voice. The idea being that if one day the Settlors were looking down on their children and they could see them arguing, and one of the children said “well mom would have done [fill in the blank],” that is the guidance we are looking for. What is it that the Settlors are trying to accomplish.

This is a precatory not mandatory statement. Trying to force how the next generations use the property will result in turmoil and destruction of the trust. No one likes being told what to do, but having a little guidance never hurts.

Use of the Treasured Property

1. Property Use Agreement – decided by the Family Line Trustees. Terms you would find in a property use agreement could include:

Appointment of a calendar manager.
Appointment of a budget committee.
Whether non-family are permitted to be guests to the property with or without prior permission.
Approved activities and/or limitations on activities.
Approved events and/or limitations on events held at the property.

2. Lottery System

3. Snaking Calendar System

Family Buy-In (or Buy-Out) – To Use or Not to Use, that is the Question

More often than not, the Settlors say “well what if Joey doesn’t want to use the lake house, then he should have an opportunity to be bought out.”

But should Joey have an opportunity to be bought out?

If Joey is bought out, then does that mean his entire Family Line is bought out and none of Joey’s kids or grandkids or great grandkids can ever use the property? If Joey doesn’t want to participate in decisions, then he can appoint a Family Line representative (a non-blood related person) to represent his Family Line. If Joey appoints himself but refuses to cooperate the bylaws also have removal provisions.

To offer a buy-out arrangement, the Settlors are essentially paying Joey to not use the property. Did the Settlors pay Joey not to use the property during their life? If Joey doesn’t want to use the property, then he doesn’t have to, he doesn’t need bought out for that to happen. The buy-out monies would come from the Property Maintenance Fund, decreasing the amount that could be invested and used for future generations.

What if Joey’s life changes and he makes amends with the family and wants to use the property at some point in the future and he really saw the buy-out as a quick way to get cash? Does he have to return the money with interest?

Just like any trust, the beneficiary doesn’t have to draw from the trust if they don’t need to.

Conclusion

Estate and trust planning is all about goal achievement with risk mitigation. Define your goals for the Family Property Trust and work with an experienced estate attorney to achieve your goals.

As mentioned before, Family Property Trusts are not for everyone. Depending on the particular circumstances, paired down versions of this plan can be utilized. For example, if the “camp” is valued at $20,000, bylaws will not likely make sense, as compared to a lake house or cottage that is valued at $2,000,000. In which case, the trust structure can be utilized but with general directions to allow the trustees to promulgate the same rules and structures moving forward.

As with every estate plan, there is no one size fits all trust. Each time we prepare a property trust, there is always something uniquely different from the previous one, the main reason being that each client is uniquely different.

Authors: Kenzie P. Ryback and Thomas C. Hoffman, II

Originally published in November 2024