Estate Planning Checklist: What happens to the family cottage

Disclaimer: This article on the family cottage and your estate plan is intended for the purposes of providing information only and is to be used only for the purposes of guidance. This article is not intended to be relied upon as the giving of legal advice and does not purport to be exhaustive.

For many families in Ontario, summer means one thing – the family cottage.  For these families, the cottage may have been passed down for generations. It may be the place where family traditions have begun and where they continue year after year. 

You must consider your family’s cottage when you create your estate plan.  It may be one of the most important assets that you own. As such, you must have a plan in place for what happens to the cottage when you pass away.

We recommend starting with a family conversation. This is a conversation that should involve all family members who have an interest in the cottage to come to a consensus about its future. Once you have done this, you can begin to put together a plan.

Of course, your cottage is just one asset in your estate. You should speak to an estate lawyer about your entire estate plan.

In this article, we will outline a few scenarios of how your estate planning can impact the family cottage. We will also note some things to consider when planning for the future of your cottage.

The Tax Implications of Passing Down the Cottage

If you are considering passing down the cottage to your children, you must be aware of the potential tax implications. Canadians can have one “primary residence,”; any other property is a “secondary residence”.

Secondary residences are subject to capital gains tax when they are sold. This means that if your children sell the cottage, they must pay capital gains tax on any increase in the property’s value since you purchased it.

Your cottage has certainly increased in value since you bought it, so how will those capital gains taxes be paid? Your lawyer and accountant will be able to give you some guidance in this matter.

Now let’s review some specific scenarios related to the family cottage.

Scenario #1: You Gift the Family Cottage While You Are Still Alive

One option may be to gift the cottage to your children while you are still alive.  This would allow you to avoid probate fees and potentially reduce capital gains taxes, as discussed above.

There is one thing that is important to note. If you gift the cottage while you are living, you won’t have any ownership or control over the property. As such, it is crucial that you only gift the cottage to someone who you trust implicitly.

Scenario #2: Leaving the Family Cottage to Your Children

You may love the idea of all of your children enjoying the cottage together for generations to come. However,  it may not be the most practical solution.

If you have more than one child, it is likely that they will not all live in close proximity to the cottage. This can make it difficult to manage and care for the property. Siblings may also have different ideas about how the cottage should be used, which can lead to conflict.

There are three ownership structures to consider:

Co-Ownership

You can consider leaving the cottage to your children on the condition that they they enter into a co-ownership agreement. This agreement would set out how to use and maintain the cottage. If they cannot enter into a co-ownership agreement, the chances of them being cooperative co-owners is slim.

Joint Tenancy

If your children share the cottage as joint tenants and one passes away, the surviving owners divide their share equally.

Tenancy in Common

When a part-owner dies under a tenancy in common, his or her share goes to his or her estate and is dispersed according to the deceased’s Will.

Creating a Cottage Trust

One option can be to place the cottage into a trust, which is a separate taxable entity and will have reporting obligations. The benefit of doing so is that the cottage can be protected from any future creditors of the beneficiaries and can help to minimize estate taxes.

You can also stipulate the terms of the trust, much the same as you would in a co-ownership agreement.

However, there are some drawbacks. For example, you are not avoiding the tax implications altogether. Your heirs will still need to pay capital gains tax every 21 years.

Scenario #3: Leaving the Family Cottage to One Child

In some instances, only one of your children may want the cottage or be in a position to own and maintain it.

There are a couple of options for how you can address this situation. First, you may want to include an “option to purchase”  clause in your Will, which would give the child who wants the cottage the first right of refusal to buy it from your estate at a fair market value.

Another option is to leave the cottage to one child but give your other children the cash equivalent if you have enough other assets to do this. This way,  you treat everyone equally.

The Bottom Line

There are a number of things to consider when it comes to estate planning for the family cottage. It is best to discuss all of your options with a lawyer and accountant to ensure that you are making the best decision for your situation.

When it comes to planning your estate, you need advice that you can trust. At Beeksma Law, we understand the sensitive nature of these conversations and can provide you with the guidance you need to make the best decisions for yourself and your family. Book your consultation with our team today.