Cottage Considerations

For many families, a cottage property represents various things: a great investment in real estate that often appreciates in value, a family legacy that connects generations, and the source of happy memories. However, if the current and future ownership and use of a cottage are not carefully managed, they can become a serious source of conflict for siblings, for example, or a point of resentment between children and a surviving spouse from a second marriage. Unclear instructions or terms of inheritance can also cause conflict between beneficiaries and an executor, depending on how an executor’s discretion is established in a testamentary document.

As a cottage is usually not a principal residence, an additional, very important consideration is how capital gains will be taxed and paid on disposition.

An immediate consideration for cottage owners is who exercises control over a property now: who is permitted to use it, when, and who besides the owner might be responsible for the ongoing costs of maintenance and upkeep? To what extent are non-family visitors permitted, or can a cottage property be rented out? Can a family member who comes to the cottage regularly each July make upgrades to a building? Put in a satellite dish? Expand a beach? While those concerns can usually be managed by good will and discussion, if necessary, it may be prudent to put terms of use or financing in writing to clarify the rules and expectations.

Additional considerations when it comes to how someone uses and enjoys a property can arise if that person contributes labour or money towards the upkeep or improvement of a property, based on an idea that they have been promised that “all this will be theirs” someday. If a child is under the impression that they will inherit the cottage, and on that basis they rebuild the dock and put in a new sauna, but the estate planning does not bequeath the cottage, the child could have a remedy against the estate that could include payment to compensate them for their financial losses, or a licence to use the cottage for a period of time, or an ownership interest in the property.

It is absolutely essential that cottage owners include this asset in their estate planning. That estate planning has to be crafted to account for particular family circumstances. Some questions that you should ask yourself when doing this type of estate planning include:

• It is prudent to separate the cottage out from the residue of an estate and give specific directions about what happens to it when someone dies.
• How will capital gains taxes be paid?
• What are the ramifications of this inheritance on the heirs? Will they be able to afford to pay the costs of ownership, including taxes and maintenance? If there’s a sudden need for a large expenditure, such as a new roof or a septic system, will the heirs be able to afford it?
• Should the estate make a provision for a maintenance or upkeep fund, at least in the short term? Is personal contribution to the costs of upkeep a condition of inheritance?
• If there is more than one heir, what form will their ownership take? Will they own the property jointly, with other heirs, with a right of survivorship? Or will their ownership interest allow them to include the cottage in their own estate planning? What are the advantages or pitfalls of the different options for ownership?
• How will disputes among a new generation of owners be managed? For example, what if one heir wants to sell the property and another disagrees? Is there an option for the person interesting in selling to be bought out, and on what terms? Should there be a directive about appraisals? Should there be a time-limit for how long one heir has to wait for the others to make a decision about sale?

Estate planning for cottages should deal with this asset not only in terms of what happens to it when an owner passes away, but also how the cottage is managed if an owner is alive but not capable of managing their property because of an illness, for example. If the owner has appointed a power of attorney, should there be limitations on that person’s appointment that prohibit the sale of a cottage, or permit a sale only under certain conditions?

Estate planning for cottage properties can include various legal options, and it should include discussions between clients, lawyers and financial planners. It could be prudent to include other interested parties, like family members, in these discussions. There is a range of strategies you can review to see what is right for you and your family, including the transfer of all or partial ownership during someone’s lifetime, provisions for the cottage in a last will and testament, or the transfer of cottage property into different forms of trusts, with named beneficiaries and terms of management. Each of these decisions can have an impact on the probate process when a death occurs, the payment of probate taxes, and the allocation and timing of income taxes.

A well-considered estate plan can be creative when it comes to keeping a cottage property in a family, and can give heirs many years of conflict-free use and enjoyment. A poorly-considered plan, or the lack of any plan, poses a significant risk of forcing family members to turn to the courts to resolve disputes about cottage ownership, related expenses, or who gets to spend the prized long weekend at the lake. Please feel free to contact us if you have questions about estate planning for cottage properties.

We would be pleased to assist you so you can take the uncertainty out of what will happen to the property, and head out in the canoe instead.  Please contact us at hello@dicksonappell.com or (416) 927-0891