The family cottage is a fixture on our shorelines, lakes and rivers. As the May long weekend approaches, those with cottages will be turning their minds to the annual tradition of heading to the shore, lake or river to open up the cottage. It might also be a good time to give some thought about what will happen to your cottage when you are gone.
Like any property, the cottage is an asset that passes to the next generation. However, unlike most other assets, the cottage is often considered “unique”, requiring special treatment. A common refrain I have heard over the years goes something like, “We want to keep the cottage in the family…forever”. This sentiment is most often expressed by parents who are the original owners of the cottage who envision their children, grandchildren, etc., blissfully co-existing and enjoying the cottage together into the unforeseeable future, long after Mom and Dad are gone. The problem with forever is that it is a very long time.
There are significant differences between the family cottage and other assets that make planning around it tricky, not the least of which is taxation. The cottage is usually a second property meaning it will attract capital gains tax as it passes to children. Unless there is enough cash in the estate to pay the tax (along with other bills) other assets may have to be sold in order to cover the tax. Ironically, sometimes the cottage itself must be sold in order to pay the tax it attracts. There are different ways to deal with taxes but it is important to recognize taxes as an issue.
Assuming there’s enough money to pay the taxes, then what? If there are two or more children that means two or more owners. It may mean two or more families (including sons-in law and daughters-in-law). It means two or more different schedules and two or more collections of powerful emotions and longstanding family memories (good and bad), all of which can come into conflict with one another.
What should you do?
As with all estate planning, it is important to talk to all family members. Find out how people feel about the cottage and what they want. Many parents wrongly assume their children share their wishes about the cottage. Although those discussions might be difficult or awkward, they will help determine people’s interest. The discussion might turn out to be easier than you think. It will definitely be illuminating. Who wants the cottage? Who wants nothing to do with it? You might be surprised by the answers.
FUTURE COST SHARING, USE AND OWNERSHIP
There is no magic formula for cost sharing, use and ownership. The plan will depend on the circumstances of the family members and their relationships with one another. One child might want the cottage but have limited means to contribute. Another might be able to afford to contribute but have limited or no interest. There are expenses such as insurance, utilities and ongoing general maintenance costs (minor and major), and don’t forget about “the guy” who helps with opening and closing the cottage each year. How will these costs be shared, especially if your children have varying abilities to pay? Differing financial circumstances among family members can cause friction when it comes to ongoing expenses, as well as renovations or other large expenditures.
Coming up with a fair system to determine when and how often family members get to use the cottage is important. This will depend on how many family members you have, where they live and their schedules. One family member may have more time during the season to use the cottage than another (a school teacher, for example). Often times children who live nearby wind up using the cottage much more than those who live far away.
Someone has to own the cottage. Who will it be? If there is only one child, there is usually no issue. However, if there is more than one child, you have some decisions to make. Will they all own it or will you leave it to only one who will be in charge of everything (I’ve seen the latter with mixed results). Perhaps you will put the cottage in a “Cottage Trust” with a “Fund” to help with costs (I’ve seen these attempted and abandoned more often than not).
OBTAIN PROFESSIONAL ADVICE
If you are fortunate enough to have a cottage to pass down to your children (along with all the great memories and family traditions that go along with it), it is well worth the time to seek out some legal and tax advice about how to best do it. Like all estate planning, it is not as difficult as you think if you just put your mind to it and get some advice.
One of the hardest parts of planning around a cottage is acknowledging and coming to terms with the different personalities of our family members and their relationships with one another. Every family has some dysfunction, and coming to terms with that in advance will help with your cottage planning.
Have an honest discussion with everyone involved and then get some legal and tax advice from your trusted advisors.