Michigan Cottage Law

Co-Ownership of Second Homes

Many Michigan families own a second home, whether a lakefront residence, ski chalet, cabin in the woods, or beachfront condo (a “Cottage”). Indelible memories and bonds are created in these places, sometimes by multiple generations. Time spent at the Cottage is restorative, it helps us recover from the fatigue of urban life, the constant multitasking, connected at all hours of the day to our careers and responsibilities.

As a result, the Cottage takes on a special, almost spiritual, significance for many families. There is a natural inclination in all of us to guide and invest in the next generation, to leave something meaningful behind. So, keeping the Cottage in the family after we are gone is a common goal. Indeed, the idea of selling it is often unthinkable. But keeping the Cottage in the family for one or two or more generations is probably more complicated than you think.

Michigan Cottage Law is a complex subject that requires the guidance of an experienced attorney. Contact Gaggos Flaggman PLLC to work with an estate and trust lawyer with 25 years of experience advising cottage owners, in addition to 20 years of experience personally co-owning a multi-generation family cottage in Northern Michigan.

The Appeal and Reality of Cottage Co-Ownership

Co-ownership offers real advantages: shared costs and responsibilities, the ability to own highly desirable property that may otherwise be out of reach, and the enjoyment of sharing unique experiences with loved ones. For many, the cottage becomes the deep source of wonderful family memories.

But shared ownership also brings shared risk. The cherished memories and the positive emotions tied to these places intensify the tension that arises when co-owners use the Cottage unevenly, schedules collide, chores or costs are disputed, or one party wants out.

Without ground rules, “everyone does their own thing and will just work it out” will eventually cause problems. But getting it in writing is much easier said than done.

Pros and Cons of Co-Ownership

Pros/Benefits

• Lower individual cost for purchase, insurance, taxes, and upkeep.
• Joint responsibility for chores.
• Access to high-amenity locations that might otherwise be unaffordable.
• Shared family enjoyment and continuation of the “cottage legacy.”
• Optimal tax deductions for real estate taxes and expenses (if properly structured).
• Relational and emotional value: multi-generational family bonding.

Cons/Risks

• Unequal use of the Cottage giving rise to feelings of resentment.
• Disagreements over maintenance, improvements, and scheduling.
• One co-owner’s nonpayment of proportional ownership costs.
• Difficulty transferring or selling an ownership share.
• Risk of “uncapping” Michigan property taxes on transfer (MCL 211.27a).
• Exposure to partition: a co-owner can force a sale through court.

Common Problems in Cottage Co-Ownership

• Scheduling Conflicts: Everyone wants the Fourth of July or Winter Break ski week: without a written schedule, disputes are inevitable.
• Payment Responsibilities: Who pays for what? What happens if one owner doesn’t pay their share or simply objects to a desired expansion or improvement.
• Mindset Differences: Some treat the cottage as a special family retreat; others see it just as an investment.
• Generational Transfers: When parents pass away, siblings inherit fractional shares creating valuation and tax complications. Some may want out or can’t afford nor have time to use the Cottage.
• Exit Planning: Without a buy-sell clause, one owner’s desire to sell can lead to a lawsuit to force the sale (known as “partition”). And even if temperaments don’t boil over, feelings of resentment will simmer.
• Uncapping Property Taxes: Transfers without proper planning can cause sharp increase in real estate taxes.
• Lack of Governance: Without a written agreement addressing all of these potential problems, co-ownership will become unsustainable, and relationships will be compromised forever.

Work With an Experienced Michigan Cottage Law Attorney

If you are seriously considering keeping the Cottage in the family the key to long-term success involves some level of legal planning. Michigan families typically use one of three methods to hold and manage their Cottage.

Cottage Sharing Agreement - Tenants in Common

Some co-owners choose to hold the Cottage in their individual names, each owner having a deed reflecting title jointly. That is, they do not use an entity like a Trust or Limited Liability Company (LLC) to directly hold the property.

Although this method of Cottage co-ownership, which is grounded in contract law, has its shortcomings, it is simple and easy to establish. Basically, the co-owners all sign a written co-ownership contract (“Sharing Agreement”) that sets out clear rules:

• Who uses the property and when (rotations, scheduling, prime-week allocation).
• How decisions are made (voting, management, budgeting).
• How expenses and improvements are paid.
• How co-owners handle defaults, capital calls, and repairs.
• Tax treatment of expenses and deductions, with the appropriate contractual restrictions to ensure the real estate taxes do not increase.
• Buy-sell provisions for voluntarily exits and valuation.
• Succession terms for death or incapacity.

A simple Sharing Agreement goes a long way to avoid co-ownership problems, but subjecting real property co-owners to a general contract has limits, legally speaking. If drafted properly you can rest assured the Agreement will govern most issues that arise, but binding future generations to a contract only current generation owners sign is tenuous. Buy-sell provisions governing what might be the most critical provision to assure the Cottage stays in the family run against fundamental principles of real estate law which weakens enforceability, opens the possibility of the property being “partitioned (i.e. forced sale), therefore compliance with the Agreement eventually becomes uncertain.

So, Sharing Agreements are optimal for shorter term legacy goals, for those who desire to keep the Cottage in the family for just one more generation. Or for a finite period after mom and dad have passed away, usually between 10 and 30 years. Other situations that are well suited to a simple Sharing Agreement involve families that have few branches, say just two children who may inherit the Cottage, who themselves have only one or two children. The less parties to the Agreement the more likely the contractual arrangement will be sustainable.

Title Through a Cottage Trust

A Cottage Trust leverages long standing statutory and case law to enable centralized control of a Cottage, avoid probate, and provide continuity of management. The trust owns the property, the Trustee(s) manage it, and the beneficiaries have flexible rights to use it. The Trust needs a bank account and funds to cover costs and maintenance of the Cottage.

For more certain and favorable results, the current Cottage owners should also consider transferring money to the Trust to cover costs for as many years as they anticipate it being held after their death. But the Trust may also be designed to require (to the extent permitted by law) the beneficiaries (children, siblings, or cousins, for example) to contribute time and money to sustain the Cottage Trust.

The trust agreement itself sets the ground rules, the Trustee is empowered to enforce them, and the beneficiaries may enjoy the Cottage provided they comply with the terms of the procedures set forth in the Trust.

A well-drafted Cottage Trust can also help avoid property tax uncapping in Michigan, so long as transfers occur within the “blood relations” exceptions defined under MCL 211.27a. Additionally, it prevents individual owners from forcing sale and ensures consistent stewardship across generations, enabling tax optimal allocation of expenses.

Ownership Through an LLC

An LLC offers liability protection and business ownership structure. The property is owned by the LLC, and family members hold membership interests (similar to shares of stock). The Operating Agreement governs the co-ownership:

• Decision-making and management authority.
• Payment of expenses and capital calls.
• Scheduling and use rights.
• Exit and buy-sell procedures.
• Limitations on transfers to non-family members.

Unlike co-ownership Sharing Agreements, an LLC is strictly enforceable; there are no real property laws or public policy arguments that will compromise the sustainability of the Cottage legacy. Likewise, LLCs are governed by laws that are consistent and specifically designed for co-ownership, especially if the Cottage is rented to third parties. So, having an LLC enables more flexibility and long term sustainability even over Cottage Trusts. However, transfers of the Cottage ownership to the LLC must be structured carefully to avoid property tax uncapping.

Michigan Tax and Succession Alert: Uncapping and The Blood Relations Exception

Under Michigan’s Proposal A and MCL 211.27a, when a “transfer of ownership” occurs, the property’s taxable value “uncaps” to current market value: often doubling or tripling the tax bill.

Fortunately, transfers between certain relatives: spouses, parents, children (including adopted children, and stepchildren, may qualify for an exemption. However, formalities matter. Improper titling or entity transfers can trigger unintended uncapping.

A properly drafted Cottage Trust can maintain the capped taxable value, but this requires foresight and legal precision. Same with Sharing Agreements, restrictions must be imposed to avoid ineligible co-owners from compromising the exemption. Finally, LLCs may avoid uncapping and tax increases, but there are limits with LLC in the long run.

The Critical Role of a Buy-Sell Plan

Every family must plan for an eventual change in ownership. Without a Buy-Sell Plan, co-owners can become trapped with illiquid shares or forced sales. A good plan provides:

• Valuation procedures (appraisal or agreed formula).
• Rights of first refusal among family members.
• Installment payment options for affordability.
• Restrictions on transfers outside the family.
• Elective transfers in the event of divorce, disability, or death.

Buy-sell provisions preserve both the cottage and family relationships by ensuring fairness and predictability.

Why Plan Now?

If you own a Michigan cottage or will inherit one in the foreseeable future, the sooner you act the better. The absence of structure invites tax surprises, financial conflict, and emotional strain.

A well-drafted Cottage Sharing Agreement, Cottage Trust, or LLC Operating Agreement ensures clear governance and a stable path for future generations.