In the last few years, I had the pleasure of spending many summer weekends at a friend’s family cottage in the beautiful Georgian Bay. Like many retired Canadians, my friend’s parents spend virtually every weekend at their cottage, which they built with their own hands decades ago, and plan almost every holiday and major family event there. As a result, this cottage has significant emotional value to the family and will likely require special consideration and discussion in their estate-planning scheme.
Cottage and vacation home succession is a conflict-ridden area of estate planning as family members may have different personal goals and levels of emotional attachment to the property. The parents may want the cottage to be kept in the family for generations while the children may balk at the high maintenance costs and long drives to the property and would rather sell the property when the parents pass away. Consequently, planning for the family cottage should always start with a family conference with your children and discuss how they may wish to deal with the property in the future.
In order to minimize probate costs for their estate (in 2014, probate fees in Ontario are equal to $5 per $1000 for the first $50,000, plus $15 per additional $1000, valued on the gross value of the decedent’s property), many parents choose to transfer the cottage to their children while they are alive. However, a gift or sale of the cottage property to the children will trigger a capital gain tax liability on the fair market value of the property, which can be significant as multi-generational cottages tend to have large unrealized capital gains. Additionally, it is important to consider that you may not want to give up ownership and control over the cottage before you pass away.
While there are many other options in planning for cottage succession, a testamentary cottage trust under your will can be a great tool in providing flexibility for you and your beneficiaries. It is a particularly good strategy if it is important for the testators to keep the cottage in the family and to minimize conflicts among the children as the testator can stipulate the terms of use and the beneficiaries’ maintenance responsibilities. Additionally, a testamentary cottage trust allows the testator to stipulate the process by which the cottage asset should be sold if the beneficiaries choose to do so, including specific valuation procedures to ensure that the estate receive the maximum proceeds from the sale. If the testator is worried about the beneficiaries’ ability to work out an agreement, a third-party trustee can be named for the cottage asset who can be given the power to manage the cottage property as he or she sees fit.
If you have a cottage or vacation home that holds sentimental value and requires special planning, it is important to discuss these concerns with your children and consult an estate planning professional in order to ensure that that your wishes are met. If your cottage or vacation home is located in the United States, you could have U.S. estate tax exposure, and additional planning strategies should be discussed with a cross-border tax planning expert.
