Despite their best intentions, a surprising number of Canadians believe their children will end up fighting over the family cottage one day.
According to a Royal LePage poll, one quarter of those who plan to pass on vacation properties to relatives expect a family squabble to be the result.
But it doesn't have to be that way.
The problem is that the family cottage is often a flashpoint for powerful emotions and, the longer it's been around, the greater the attachment. That's why it's important to start the succession conversation early to avoid disappointment and disputes down the road.
And you could be talking serious money here. In many parts of the country, cottage values have risen at least as dramatically as urban residences.
If you own a cottage and want to prevent family memories from becoming family nightmares, there are several things to consider long before you sit down with your lawyer to work out any financial issues:
- Do your children even want the cottage?
- Can they afford the property taxes and cost of upkeep?
- Would you consider giving the cottage to your family while you're still alive?
- Will you still want to have access and maintain control if you do?
- Should your children's spouses have a stake in the property?
- What about any divorced spouses or partners?
- What if one of your children dies before you?
- Will the property have to be sold to settle your estate?
That's a lot of ground to cover so be sure to discuss your wishes with your family — clearly not always an easy task.
No one likes to give up control and adult children are often leery of appearing overly interested in their inheritances or openly acknowledging their parents' mortality.
But not having the "talk" only complicates things later on, warns Toronto lawyer Les Kotzer, author of The Family War: Winning the Inheritance Battle.
Although estate fights are commonly perceived to be just about money, there's almost always more at work, Kotzer says. His book looks at warning signs that a family dispute might erupt and how to steer clear of trouble when it comes to something as emotionally charged as family vacation properties.
You may decide, for instance, that only some of your children should inherit the cottage and that those who aren't beneficiaries should be compensated in another way.
This means the actual cottage owners should be required to pay market value for the property and then settle up with their brothers or sisters.
If they had to, they'd take out a mortgage on the property and use the resulting advanced funds to pay the other siblings their share. However, some might see going into debt this way as a bit of an unwelcome burden.
You could even go one step further by helping to create a responsible exit strategy for the new owners. You might, for example, provide for a right of first refusal by the remaining owners and a reasonable payout mechanism for someone withdrawing. If the remaining partners can't afford to take over the departing owner's share, they could be given a veto over any proposed new co-owner.
Another solution might be to purchase life insurance to provide corresponding value to children who aren't cottage beneficiaries. This can be prohibitive, however, as you age. Premiums become more expensive and medical conditions may affect eligibility.
Alternatively, particularly if you still plan on using it for a time, you can consider gifting the property to your children, making one of more of them joint owners with you, or transferring the property to a trust with your children as beneficiaries.
If you go this route. Consider drafting a formal agreement covering shared usage, repairs, maintenance, and just who's supposed to bring the boat up at the end of the season — in other words, the very tasks that you used to assign directly.
Keep in mind that if any of these potential joint owners pre-decease you, their interest automatically transfers to the surviving siblings. In some poorly designed transfers, the cottage can suddenly end up going to one brother or sister, with the deceased sibling's children losing out.
Either way, your children should be made aware of the capital gains tax they'll likely have to pay.
Even if you pass on your cottage to them as a gift while you're still alive, the penalty could be considerable depending on what you paid for the property and how much it has appreciated over the years.
Next week: How to minimize the tax bite on cottage succession.
