The Family Cottage – Inherited Dream or Future Nightmare?

The crisp autumn air isn’t just a reminder that summer is over, but also a signal to an end of cottage season for some.

Most that invest in their own cottage do it with a mind to “keep it in the family.” Watching your kids grow up at the cottage with the thought that you will one day pass it to them to see their own children enjoy it, is a beautiful dream. But the reality is that passing the family cottage to your kids can be more complicated than it seems, and when done incorrectly can turn your idyllic dream into an utter nightmare.

With some clever estate planning you can rest assured that after you’re gone, your family will be swimming in the lake by the cottage, and not swimming in tax-related debt. You see what we did there? You get the point.

Well, there are a number of ways to minimize tax consequences when passing on your cottage. Each has its pro and cons, and each only works in certain situations.  

First, you can consider gifting the cottage to your child or beneficiary before you die. This let’s you pay the capital gains tax on it, so your estate or your child don’t have to. The drawback? The cottage doesn’t belong to you anymore. Your kid is free to sell it, not invite you over, or even lose it in a messy divorce.   

Second, if you don’t want to lose ownership rights while you are alive, you can gift it in your will. This means your kids or beneficiary will get ownership upon your death. Again, this means that your beneficiary can sell your beloved cottage, and your dreams of having your grandchildren spend summers there may come to nothing. However, even this option will likely attract estate administration tax, which will be paid for by your estate. Death and taxes, am I right?         

Third, you could set up a cottage trust. This will give you some control over the cottage after you’ve passed away. The trust then holds the cottage for the enjoyment of your beneficiaries. You can even allocate funds which can be used to maintain the property. The trust also protects the cottage from any legal disputes that may arise after you’re gone, including bankruptcy, liens and divorce. The catch? When it comes to discretionary trusts, there is what is called a “deemed disposition.” This means that every 21 years capital gains tax becomes payable on the cottage. If there isn’t enough to pay the taxes, the cottage has to be sold.

The above are overly simplified theoretical options for dealing with your cottage. In reality, estate planning is far more complicated and requires legal assistance. 

However, as you can see, you have options. You need to consider what works best in your situation, as it’s not a “one-size fits all.” I mean, you know your family better than we do, so keep them in mind when considering how to estate plan. Let’s put it this way, it’s hard enough for some parents to get their kids to listen to them now, you think it’ll be easier to dictate terms from the grave?

Robin K. Mann, JD, Associate Lawyer