Handing down the family cottage to the next generation

Matthew Bonsall


Father and son on a dock at sunset, boy looking up at his father.
 

A cottage (or the cabin or chalet, depending on where you live in Canada) can be a place that brings families together like nowhere else. But cottages can also cause painful rifts in families when the time comes for them to be passed on. The most important thing to do is to talk to your heirs and then get some professional estate planning advice based on what you think will suit your family best.

To help with your family chat, consider that the challenge of passing a cottage to the next generation often comes down to facing up to three realities: access, maintenance and taxes.
 

Access

Who uses the cottage and when do they use it?

On the surface, this may seem easy to figure out. Take the number of family members who will inherit the cottage and divide the time between them. But what happens if some of the family wants more or less, or even no time at the cottage? What happens if they can’t agree to share?

Possible solutions

Sell the cottage and add the proceeds to your estate: This may sound heartless, especially if the cottage has been a big part of the family. But if you don’t think your family can manage to share it fairly, the best approach may to sell it and split the proceeds in your will.

Establish a testamentary trust: This trust takes effect after you die and lets you define things like who uses the cottage and when. It can even create a right-of-first-refusal option to settle arguments over selling the cottage.
 

Maintenance

Who takes care of the cottage and who puts the most demands on it?

Cleaning up after other family members and repairing damage or wear and tear caused by others can be a recipe for conflict.

Possible solutions

Draw up a cottage agreement: See if your children can cooperate well enough to create a formal agreement about how to take care of and pay for cottage upkeep. Be very specific, right down to things like how the cottage is cleaned before people hand it over to other family members.

Transfer ownership to a non-profit corporation: Your family becomes members of the non-profit corporation that owns the cottage. They pay membership fees that can be used for maintenance. People can always opt out and give up the right to use the property.
 

Taxes

Are your heirs prepared for capital gains taxes?

If you want your children to inherit the cottage, and it has gone up in value since you bought it, your children will face a tax bill that will have to be paid immediately with cash that may be hard for them to come up with.
 

Possible solutions

Sell the cottage to your family and hold a demand mortgage: Taking back a demand mortgage with deferred payments allows you to spread the capital gains taxes over five years. You can forgive the mortgage in your will and the cottage may be left with no debt or taxes payable.

Transfer the cottage to your children today: You can gift your cottage to relatives or others. The gift will probably generate capital gains taxes, so get professional help to figure out what this will all cost and then approach your children. If some of your children are uninterested or unable to assume these costs, you can arrange for them to be paid more out of your estate to even things up after you die. 

 

Matthew Bonsall has more than 25 years of experience writing about personal finance and investment issues. He holds a Canadian Securities License and a is Chartered Investment Manager.