Avoid the cottage feud
Cottages were not part of my childhood — we were campers and travellers. So, when my siblings visited my husband and me at our new cottage this summer, they pointed out that I’m the first in the family to buy a cottage. The time-share we’ve purchased gives us five weeks each year to enjoy the Ontario north and to spend time with our now-adult children.
There’s no denying that as a place to escape the stresses of everyday life and appreciate the beauty of nature, little beats the time-honoured ritual of the cottage, camp, cabin — or whatever name it goes by in your neck of the woods.
Unfortunately, in spite of wonderful memories, the emotional attachment Canadians have to such properties can turn easily into emotional distress when the question “What happens to the cottage?” is neglected.
Above all, when a recreational property is part of your estate plan, it’s important to start with what you want to do — and then move on to consider what will work for other family members.
A good place to start is by considering how keeping the property affects your financial resources at this stage in your life. If,or example, having money tied up in the cottage and the expense of maintaining it are draining your budget or keeping you from doing some of the other things you’d like to do, you might consider selling.
All in the family
It’s hard for many people to admit, but your own wish to preserve the cottage for future generations may not be a priority for your offspring. Not that they haven’t enjoyed their cottage days, but if they now live on the other side of the country, for example, it may not be practical for them to spend much time there.
If you do decide that keeping the cottage in the family is the right thing, you face a number of challenges. The plan you put in place must be fair and must take into account what could happen in the future, including the financial situation of each family member and their ability to maintain the property, as well as changes that might come through births, deaths, marriage or divorce. It is also important to consider the impact of your province’s family or matrimonial laws on property ownership.
Next page: Transferring while you’re alive
Transferring while you’re alive
Gifting or selling the cottage to your children while you’re alive is one way to go. But before you transfer ownership outright to your children, consider whether you are prepared to be a guest, rather than the owner. Also, while it may seem simple to transfer the cottage equally to all your children by re-registering the title to the cottage as joint tenants with rights of survivorship or joint tenants in common, in reality, there are a number of issues to consider, including:
- How much tax would be due on any profit that results from the deemed disposition at the time of the transfer?
- Could the cottage be lost due to a forced sale down the road if one of the joint owners is forced to declare bankruptcy or is divorced?
- Are all parties willing to share the costs of maintenance or do a fair share of the work?
- What will happen if siblings cannot agree or cannot get along?
Such an arrangement would likely benefit from a co-ownership working agreement by the children, outlining how they will share the time, chores and costs.
Another option, if you’re ready to give up cottage ownership, is to sell the cottage to your child or children and take back a mortgage on the cottage. You might then forgive the loan in your will.
Cottages and wills
If it’s clear that one of your children wants the cottage and the others do not, it makes sense to leave the cottage to that child. The important thing is to ensure the other children receive an equal benefit, possibly in your will or through life insurance benefits.
Similarly, you could give one or more of your children the right of first refusal, essentially the right to buy the cottage from the estate at fair market value or to take the cottage “in kind” from the estate.
And though it may seem a simple and fair solution, just as with transferring ownership while you’re alive, transferring ownership to your children in your will is only a good idea if you’re certain they’ll get along and share both the privileges of ownership and the responsibilities. Again, you must consider all the possible pitfalls of joint ownership.
Consider a testamentary trust
Another strategy for keeping the cottage in the family is to arrange for the property to be transferred into a family testamentary trust at the death of the last surviving spouse.
Here’s how it works: normally, when the surviving spouse dies there’s a deemed disposition and a tax bill to be paid on any profits. By transferring the cottage to a testamentary trust, any tax on capital gains that might result from a subsequent increase in market value may be deferred for up to 21 years or until the trust is wound up and the cottage distributed outright to the beneficiaries.
Such a succession plan needs to address how this tax will be paid to ensure the cottage can remain in the family for multiple generations. Of course, if the market value of the cottage remains unchanged, no additional taxes would be due.
Next page: Dealing with tax and maintenance costs
Dealing with tax and maintenance costs
As discussed, normally a cottage will be subject to a deemed disposition on death before it passes to the next generation — even if there is no outright sale. So, if your cottage has increased in value by the time you die and you want to keep it in the family, you must ensure there’s enough cash, or other assets that can be sold to raise the cash, to pay the taxes. Otherwise, there’s a chance the cottage would have to be sold to cover the taxes. One option is to purchase life insurance that would pay the death benefit to the estate to fund the final tax bill.
While some of the strategies described in this article will freeze the value of the cottage for estate purposes, you might also consider transferring the cottage to a holding company or family foundation.
Ultimately, how you deal with the family cottage is very personal. You must understand the implications of all your options before putting a plan in place. Look to your advisers in tax and estate issues to help design a plan that integrates a combination of strategies. That way, your beloved cottage won’t become, as I once heard it called, “a home of headaches and heartaches.”
Will your plan for your cottage succeed? Answer the following questions.
- Will you have to sell the cottage to pay living expenses?
- Is the cost of maintenance keeping you from doing other things you want to do now?
- Does anyone in your family not want the cottage?
- Do all family members and their partners get along?
- Is any family member likely to inherit the cottage while still “under age”? If so, appointing someone you trust to make legal decisions could avoid decisions falling to the public trustee.
- How much income tax will be due when the cottage is transferred, and how will it be paid?
- How long do you wish the cottage to remain in the family?
Sandra Foster is the author of three financial books, including You Can’t Take It With You: The Common-Sense Guide to Estate Planning (John Wiley, 2002).