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.

Estate Planning Questions to Ask Yourself:

  1. Are you sure that your kids (or those inheriting the cottage) want the cottage? It may feel like they would, but have you had that conversation? 
  2. Can they afford the property taxes and upkeep?
  3. Inheriting the cottage will likely change the tax bracket those inheriting the cottage are in currently. Can they afford that change?
  4. Are you aware of the implications of selling real estate at less than fair market value? Will other siblings or people be upset by the sale?
  5. Would you rather pass it on while you’re living to ensure your intentions are clear and to reduce potential estate litigation issues?
  6. Would selling the cottage to a family member now provide needed help in paying for retirement living, home health care, medications, etc.?
  7. Who would be inheriting the cottage exactly? Direct children, or are their spouses included? Grandchildren? What is the succession plan with multiple children (inheritors) involved?

More Estate Planning Questions?

Who should I choose to be my executor?
Can there be more than one executor of a will?
How can I protect my family and assets?
What is Executor Liability Insurance?
How can I prepare my child to be the executor of my estate?
Is there a preparation course for future executors?
How to Manage Cottage Co-Ownership
Is there a guide for executors?
What are my tasks as an executor?
Can I include my pet in my will?