Leaving the Family Cabin to Your Kids? Avoid the Cousin Problem in Minnesota

Who gets Grandma's cabin? We call it the cousin problem in estate planning, and it happens when a grandparent leaves a property to their children, who then leave it on to the grandchildren. So in this case, let's say it's Grandma, and she owns a cabin. She has three children, and each of those three children has three children themselves. So we have Grandma, we have three children, and then we have nine grandchildren.

It's called the cousin problem because if that cabin stays in the family and passes down two generations, the people who now own that cabin are nine cousins. And those cousins may or may not get along. Let's say those three children went to different ends of the world. They've all lived very different lives. Their children haven't spent much time with their cousins, and now all of a sudden they all own a cabin together. And the question is, what are we going to do with it? Now we have nine owners.

What do we do if, for example, we have to pay property taxes and insurance, and one cousin stops chipping in? Another common scenario we see: who decides whether we're going to replace the roof, or just kind of patch it over again? What about fighting over who gets which week of the year? And then of course, what happens if a cousin gets divorced or sued, and their share is suddenly in play as part of that divorce?

You can probably see, when we have this family property and it's passed down for a couple of generations, you can leave a lot of headaches for that grandchild generation.

Now, when Grandma set this up, she thought she was being fair. It was equal. It went to each of my children, so a third each. Those three children spent their lives growing up in that cabin. They loved to go there in the summers, maybe some Thanksgivings they spent up there. So this is all great for them. But maybe their children, that grandchild generation, doesn't have that same connection to the cabin.

It becomes even more interesting if those three children have different numbers of children of their own. So child one only has one child, child two has four children, and child three has two children. So when we get down to that grandchild generation, that single child actually owns one third of the cabin, while all those other cousins are splitting it up into smaller shares. Is that really fair, that the one who happens to be an only child has a much larger interest in the cabin? You may think it's fair, but the reality is all those cousins can start fighting over things, and one of them has an outsized influence on what happens with that cabin.

So when I run into families like this, the basic question is: what do we want to do to keep the cabin in the family without running into a fight?

My usual recommendation would be to put the cabin into an LLC, especially if we're dealing with a cabin that we're renting out sometimes. The LLC's operating agreement should say who makes decisions, how costs get split, how the different family members can use weeks throughout the year, and if somebody wants to sell their share, what is the process for that? So we don't have the threat hanging over our heads of a forced sale of the property because one of the cousins, one of those grandkids, doesn't want to be part of the property anymore.

It's also a good idea as part of this process to have some kind of bank account or a fund that can be set up to take care of the maintenance and the other costs that are associated with the cabin.

In that LLC agreement, there are a few things we want to make sure we're focused on. First, buyout terms. So if we have that cousin who wants to sell out, what is the price? Is it the appraised price? Is it payable over several years, or is it an immediate payment? We want to make sure we have those buyout terms put together in a way that all those grandkids understand.

Next, we want to look at limits on transfer. So if we go back to that one grandchild who was getting a divorce, we want to make sure that their interest doesn't end up in the hands of their ex-spouse. Because if you think nine cousins who don't get along with each other is a bad situation, how about nine cousins plus one ex-spouse who has to deal with that ownership interest? And that ex-spouse could be the one who causes the property to get sold.

If we have those nine grandkids, I would recommend we have some kind of a team, like a management team for the LLC. Two or three, not all nine of them at the same time. But we want a couple of these cousins to be point people. So if we have those three children and then those nine grandchildren, maybe we pick one cousin from the grandchild generation from each child, and that way they can be a committee that can manage that LLC.

And if you're going to be renting it out, or figuring out how to divide it up, make sure you have a scheduling system, some kind of a calendar, so everybody knows who has the cabin when.

And then finally, we need some kind of an exit ramp. If everybody decides it's time to sell the cabin, what does it look like when that time comes? How do we do the selling? How are we going to split up the money? Because we don't want to leave that to chance. And again, we don't want that disgruntled ex-spouse of one of the nine grandkids bringing a partition action, which is a legal action to force the sale of the property.

A common question I get is: what if one of those grandkids is the one who does all the work? They're actually really handy. They're fixing up the house, they're investing, they're making everything look better in the cabin. In that case, should they get a bigger share? Oftentimes the answer should be yes, but it's up to you and your family dynamic. You don't want to leave it so no good deed goes unpunished. But you also want to make sure that we have a proper system in place, so we know what everyone's interest looks like, what kind of contributions are going to be made, and how they'll get their equity out of the cabin when they decide to sell.

The final bit is not really a legal thing. It's a family dynamic thing. What do we do with the cousins who don't even want to be part of the cabin? We want to make sure, as they're growing up, or as they're living with the cabin over the years, that those cousins, those grandchildren, understand the cabin's a family asset. It's in an LLC that's going to be passed down. We want them to feel a connection to that cabin. And those who can't feel a connection, who want to just look at it as an economic interest, say in the rental income, that's okay too. We just want to make sure that's spelled out up front, so everyone has the right expectations.

When you deal with Grandma's cabin, you can run into this cousin problem. It's a good problem to have. We have this family cabin that we want to make sure we keep in the family. We just want to make sure we're addressing these different issues that can arise. If you want to set up a call to discuss this further, there'll be a scheduling link in the description below. Or you can always head over to YouTube and hit the like or thumbs up button, subscribe for future episodes, and remember to watch out for this cousin problem when you're dealing with Grandma's cabin.