Passing on the summer cottage. How to avoid Heir war.

Your children and adult grandchildren who use it regularly may assume that it will always be there.  How do you pass on the property without causing a family fight? While no plan is ever perfect, the best place to start is talking to your children and grandchildren. There may be family close enough to use the cottage regularly, and those who live elsewhere who may only get there once every few years.  Everyone will have an opinion!

The first order of business is to avoid perceived inequities.  Given entrenched sibling rivalries, this can be difficult.  There is usually one child who is thought to be the "favorite" and another who has felt unfairly treated since childhood.  Following a death, emotions are high and a belief that there is financial inequality to back up these previously perceived conflicts breeds discontent.

When one child wants to keep and use the cottage and another wants to sell because they need the money for other goals, family conflict commences. Better to have this out before your death as there is still time to decide on a course of action rather than to simply leave your heirs to fight it out.  The only guaranteed winner in the litigation scenario is the lawyers.  The legal battle over the place of family fun could cost as much as the cottage itself, making the whole mess moot.  

When one child has performed many of the duties required to maintain the cottage, they often feel entitled to use the cottage for summer long weekends regardless of the wishes of other siblings.  If one member of the family has been the go to worker for spring opening, grass cutting, boat repairs and other members of the family simply arrive and enjoy, eventually the worker bee will feel that their sweat equity equates to either a greater share of time at the cottage or a reduction in financial contribution to cottage expenses.  During your lifetime you have been in a position to mediate between your family members, but without you in the picture, everything changes. If it is your desire to leave the property in the family, strict boundaries will need to be established when transferring ownership of the property.  

The hurdle of the ongoing costs associated with the cottage are a primary factor in your initial discussions with your family.  Are they able and willing to take on the expense of the property to maintain their ability to use the cottage for a set amount of time each year?  Is your estate prepared to continue ongoing cottage expenses?  Are you willing to set aside money to establish a family trust to take over ownership of the cottage and fund upkeep in perpetuity?

Cottage properties are usually not primary residences and carry with them the looming specter of capital gains tax. This factor alone may necessitate the sale of the property to meet the burden you are passing on to your children.  If it is established that your family wishes to keep the property, meeting with an accountant now may be a good next step.  Knowledge of what that financial burden may be to your estate after your death in terms of capital gains tax is useful information.  Forewarned is forearmed after all. Cottage properties have become increasingly valuable in recent years and knowledge of what the tax bill could be may change your or your children's opinion about the viability of keeping the cottage in the family.

A solid way of enabling family to keep and use the cottage into the future is to establish a family trust to own the cottage.  This will be a large expenditure on your behalf as you will need to fund the trust with sufficient money to pay ongoing expenses as well as lawyers to negotiate the terms of the trust and entitlement to cottage use.  It may be necessary to rent the cottage out to meet financial shortfalls.  Who to name as trustees is yet another hurdle.  All of those details, however, can be worked out with the careful drafting of the family trust documents.  Insertion of an alternate dispute resolution provision will aid the family down the road if disputes arise.

For only a lucky few is a family trust a viable option.  You may need to look at other solutions to the issue of leaving the cottage to your family, or simply sell the cottage now.  If one of your children is adamant about retaining the cottage, they could purchase it and be the new owner! Beware of becoming the mortgage holder as this leads to a whole other set of potential estate conflicts. 

Fighting over money is the leading cause of divorce in Canada.  Fighting over money is also the leading cause of estate litigation.  Any litigation brings out the worst in people and permanent estrangement is often the result. When you die, your children will understand that your house needs to be sold and the proceeds, after payment of estate expenses and taxes, distributed. Cottages do not seem to fall into this category as there is a greater emotional attachment.  Unfortunately, few family members will have the financial wherewithal to outright purchase the property or buy out other family members for exclusive ownership.  

If you choose to leave the cottage to your children you may do this as a specific bequest.  You will need to specify how they are to hold title.  You have two choices.  Joint tenancy carries a right of survivorship while a tenancy in common means that each of your children will own a percentage of the property and could potentially sell their share. During the estate planning phase of your Will preparation this detail should get careful discussion. 

If you do not specifically address the cottage issue in your Will, the property becomes part of the residue of your estate to be liquidated (sold) by your estate trustee.  This requires your estate trustee to maintain the emotional detachment to carry this out.  Naming a bank or a trust company to be your executor may aid your family in getting through the process with less strife.  

Every family and situation is different.  If you own a cottage and wish to consider its future disposition to your family, contact Brown Law to get legal advice to address your unique circumstances.