Don’t let your summer dreams become an estate planning nightmare

Remember that BIG fish you caught when you were five and came back to tell the story? 

Some of my fondest memories were made at our family cottage on Lake of the Woods in Ontario. We would spend a couple of weeks out there every summer with my dad’s parents and cousins fishing, jumping off the boat house, learning to water ski and hiking through the old gold mine with grandma leading the way (it was her short-cut back to the cottage). 

While it’s a joy to reflect on these memories, there are some future implications to owning a cottage that can be less pleasant if you are not careful. Indeed, if it is your dream to pass your family cottage down to future generations, thoughtful planning needs to take place. 

Monetary and sentimental value

Cottages are often one of the most valuable assets in a family – both in monetary and sentimental terms. This may be why they tend to become one of the more contentious aspects of estate planning.

Some may argue that it’s best to put sentiment aside and simply sell the cottage. With this approach, you can avoid financial complications like unfunded tax liabilities, and practical complexities like deciding how the heirs should share the use of the cottage. You can simply divide the after-tax sale proceeds among your beneficiaries as you see fit.

If this is your choice, it is advisable to clearly communicate your intentions well in advance. Disputes are more likely to arise if news of selling the cottage comes as a surprise to anyone. This is particularly true if the cottage is being sold or gifted to just one family member. It’s better to discuss your decision now than to have it create conflict later.

Alternatively, you may feel that it is preferable to keep the property in the family in order to preserve tradition and enable future generations to continue creating fond summer memories. 

If this is your decision, communication is again essential, particularly if the cottage will become a shared asset among more than one household. Collectively deciding how the property will be owned, used and maintained will be vital to the cohesion of the family going forward.

Here are some financial planning considerations to discuss with your advisor:

• Taxation. The cottage has likely appreciated in value over time and this can mean substantial tax implications. What is the best way to pay capital gains tax and avoid double taxation?

• Purchase. Being able to afford the cottage can become a major issue for future beneficiaries. How will they fund the purchase of the cottage?

• Maintenance. Who will be responsible to pay for the property taxes, maintenance and upkeep of the property?

• Liquidity. What is the process if one beneficiary wants to sell their share?

• Protection. How can you protect the cottage from becoming part of matrimonial property where it could be at risk in the event of a separation or divorce?

Drafting a shared asset agreement or establishing a trust are two ways you might handle at least some of these considerations. These legal structures can help you plan for tax implications and establish the rights and responsibilities of your beneficiaries.

Deciding how to handle the family cottage requires thoughtful conversations and practical education around the available options. If you’ve been thinking about addressing this important issue, your Cumberland Portfolio Manager is someone who can help facilitate the process for you.