In the new series, Barriston Briefs, Lisa Roszell writes about keeping the cottage in the family through cottage estate planning,
This Victoria Day as we opened the family cottage, taking down shutters and sweeping the floors, another kind of housekeeping was on my mind: cottage succession planning.
Our cottage has been in the family for 85 years. From its uneven floors, down to the shoreline where we caught crayfish, this place is home.
My mother wants the cottage stay in our family for generations to come. That intention and the desire to reduce tax are two primary objectives in cottage estate planning.
If my mother leaves the cottage property to my sisters and I in her will, capital gains tax will be due on the transfer. This liability has the potential to swallow the entire value of her estate, including the cottage. But with some advanced planning, the tax hit may be minimized.
My sisters and I will consider taking out a life insurance policy on our mother. As named beneficiaries, we could use the proceeds of the life insurance policy to pay capital gains tax on the cottage.
Another option is a staged transfer. My mother could transfer 1/3 ownership of the cottage to my sisters and I over 3 consecutive years, thereby breaking down the tax liability into three manageable payments, rather than one large hit.
Finally, consideration should be given to designating the cottage property as my mother’s principal residence to avail us of the principal residence tax exemption.
Not all cottage succession planning deals with tax and financial issues, however. Co-ownership among siblings can lead to disputes over cottage costs, maintenance tasks, and decision-making matters.
A family cottage co-ownership agreement may solve the above problems. This contract, signed upon the transfer of ownership from parent to children, addresses the assignment of responsibilities, cost sharing, maintenance, and what would happen if one sibling wished to sell her share of the cottage. Advanced drafting and review of the agreement often sparks discussion as to what co-ownership among heirs would look like, and whether that is a feasible plan for the future.
If your family is like mine and cannot picture a summer without the lake, I hope the above tips help you to ensure your family cottage is enjoyed for years to come.