What To Do With The Family Cottage: Four Ways To Pass It On

Spending time at the family cottage is one of the greatest perks of Canadian living, yet along with all of those great memories comes the potential for an inheritance debate.

Every family who owns a cottage will one day have to ask themselves, “how do we pass it on?” Unfortunately, there is no single answer to that question.

“There is no one size fits all solution when it comes to estate planning and cottages.  It really does depend on a person’s circumstances and goals.” – Tarsem Basraon, TD Wealth

Romana King explores the cottage inheritance debate on MoneySense.ca and recommends four methods for passing on your family cottage.

1. Gift It While Living

The first option is to gift your cottage while you are still alive. This option is especially ideal if you don’t want to or cannot use your cottage anymore.

  • Have an open conversation with your family about the cottage (this is a necessary first step no matter which option you choose).
  • Ask yourself questions like “do my children even want the cottage?” and “how do I want to divide the cottage among my children?”
  • When you gift your cottage early, you’re able to pay the current tax burden (which is the tax on capital gains that have accrued from when you first purchased the cottage to the fair market value of the property when you gifted it.)
  • Consider using a five-year structure when gifting the cottage to avoid a large one-year tax bill.

Be aware that if you do choose this option, the asset could be sold or become exposed (for example, if your child is going through a divorce.)

2. The Straight Sell

Selling the cottage and gifting the revenue to your family is the simplest way to transfer the value of the property.

  • Have your will include that upon your death the cottage is to be sold and after all taxes and fees have been paid, the remaining amount is to be evenly divided among your beneficiaries.

While the option of selling the family cottage is not easy for most people to consider, it can offer the financial freedom to invest in a different property.

3. Gift It to Your Heirs

In this method, you indicate who the heirs will be in your will, then they become co-owners of the cottage.

  • Have a co-ownership agreement created which outlines responsibilities such as property maintenance.
  • The agreement can also include instructions for the selling of the cottage should a co-owner not want their portion.

This way is often preferred to the Trust method discussed below.

4. Gift It In a Trust

This method is similar to the one above, except that instead of leaving the asset directly to your heirs you are leaving it in a trust.

  • Funds from the trust can be allocated towards responsibilities such as property maintenance, providing more control.
  • A trust will protect against legal disputes such as divorce or bankruptcy.
  • There is a yearly fee associated with the setup and management of a trust, making it the less popular option.

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