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Passing On The Family Cottage

cottage finance

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Top 3 Challenges Families Face and Solutions to Overcome Them

A cottage can be a wonderful place that brings families together like nowhere else. Unfortunately, the cottage can also become a source of stress as aging parents start to ponder how to pass on the family cottage to the next generation. This is why it is so important to have family discussions well in advance and get a financial professional to advise you on the best solution for your specific situation.

To help with those initial family discussions, we have put together 3 of the top challenges families face along with potential solutions to overcome them.

Challenge #1: Who uses the cottage and when do they use it?

This may seem like an easy thing to figure out, but what happens if some of the family wants more or less time at the cottage. Also consider that someone may not want any time at the cottage. What happens if they can’t agree to share?

 Some solutions may include:

  • Sell the cottage and add the proceeds to the estate – This option may be difficult emotionally if the cottage has been a big part of the family.  It may however be a good option as the proceeds of the sale can be divided in the will and family members can choose to use the proceeds to purchase a cottage of their own.
  • Establish a testamentary trust – This trust takes effect after death and allows the deceased to outline 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.

Challenge #2: Who takes care of the cottage and who puts the most demands on it?

While everyone loves to relax at the cottage, not everyone loves to maintain it.  Cleaning up after other family members and repairing damage or wear and tear caused by others can be a recipe for conflict.

Some solutions may include:

  • A cottage agreement –  Create a formal document that outlines how to take care of and pay for cottage upkeep. You will need to 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 members will become members of the non-profit corporation that owns the cottage. Each member will pay membership fees that can be used for maintenance.  People can always opt out and give up the right to use the property.

Challenge # 3: What are the tax implications of transferring the cottage?

As you probably know, the the value of cottages has increased significantly over the years.  What you may not know is that as much as 50% of the increase could be taxable at death. There are numerous strategies you can use to limit your tax liability or provide cash to pay the tax after the family member that owns the property passes.

Some of the solutions may include:

  • Start a savings plan in advance to pay the taxes
  • Sell the cottage and use the proceeds to cover the capital gains tax and avoid estate administration taxes on the asset
  • Purchase life insurance in advance to cover the tax liability
  • Sell the cottage to your children today and transfer the future tax liability to the next generation

Remember, it is always best to work with a financial professional that can help you match the best strategy with your situation.

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Jay Newton BA, CLU, CHS, EPC
Wealth Advisor
Newton Financial
Worldsource Financial Management Inc.

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*These posts are for educational purposes only and is not intended to provide specific personalized advice including, without limitation, investment, financial, legal, accounting or tax advice. Please consult an appropriate professional regarding your particular circumstances. Some of the information contained herein might be from sources believed to be reliable, however, we cannot guarantee that it is accurate or complete. The views expressed are those of the authors and writers only. Mutual Funds and Segregated Funds provided by the Fund Companies are offered through Worldsource Financial Management Inc., sponsoring mutual fund dealer. All other insurance products and related services are offered through Newton Financial Ltd.