As families grow, five ways to transfer ownership of the cottage

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The cottage of yesteryear — the remote cabin everyone grudgingly shared – is no longer. High-net-worth families are now investing in sprawling, multi-million-dollar properties in coveted areas. Or they’re upgrading and expanding family cottages in prime locations such as Muskoka, Tofino or the Laurentians, transforming them into luxe, all-season homes.

As families grow, with multiple generations using the cottage, issues regarding management, maintenance and future ownership crop up. Families may start with the small stuff, such as who uses the cottage at what times and who pays for maintenance.

But who will own the cottage in the future? Should siblings own equal shares? Do spouses have ownership rights? If these issues aren’t handled carefully by lawyers and family office advisors, they can create conflicts for years to come.

The answers are also highly dependent on the client’s situation. “What’s right for one person is not right for all,” says Jennifer Butkus, an estate lawyer with McKenzie Lake Lawyers in London, Ont.

Draw up the details

For clients with growing families, it’s a great idea to draw up a co-ownership agreement – much like a shareholder’s agreement — that lays out what each party will pay for the use or maintenance of the cottage, how much time they will have to use the cottage, whether guests are welcome and how taxes will be paid, says Margaret O’Sullivan, managing partner, O’Sullivan Estate Lawyers in Toronto.

Questions that might need to be addressed:

• Who manages use of the cottage?
• How many weeks per year will everyone in the family receive, and how will those weeks be allocated?
• How will maintenance, taxes and repairs be shared?
• How will the cost of any work done by family members on the cottage be divided – or compensated for?
• Can family members trade their weeks?
• Should longer-staying family members pay more than others?

“Each arrangement is extremely unique,” says O’Sullivan.

Having tough conversations

Sloan Levett, president and partner, Family Office Services, at Fuller Landau LLP in Toronto, says many of his clients who have owned a family cottage for years are in their 60s now and want to pass it on to their adult children. But many haven’t done much planning and have failed to consider the financial situations or desires of their kids.

He often asks them whether they have had conversations with the children to determine their interest in taking over the property.

“In some cases, kids have started careers in the States and they won’t be able to enjoy the cottage later on,” says Levett. Or they aren’t in a financial position to take on the maintenance costs and taxes associated with cottage ownership. “A cottage is not an insignificant cost,” he says.

As a result, Levett recommends that his clients have conversations with their children about the future of the cottage well before any transfers take place. “This sets up the process and manages expectations as things come up down the road,” he says.

Transferring the cottage

For cottage-owning clients who decide to transfer ownership, “we’re always looking at the cottage as part of a broader estate plan,” says Butkus.

Here are several approaches to handling a cottage transfer:

Create a trust: In cases where it’s unclear who will inherit the cottage and tax avoidance is needed, the cottage can be placed in a trust with the spouse and children appointed as co-trustees, Butkus says. In this structure, there would not be any probate fees, as the cottage is no longer considered part of a deceased person’s estate, but any appreciation in value between the purchase date and transfer-to-trust date could trigger a capital gain if the home is not considered a principal residence. Under the 21-year rule, the trust will be deemed to have sold the cottage property at fair market value every 21 years and recognize the accrued gain (if applicable) if the property is still owned by the trust, says Levett.

The trust structure protects the cottage from one family member selling it or matrimonial breakdowns, and it forces the family to work more as a team to determine its future, says Butkus. But if the property is sold by the trust, the trust might not be eligible to claim the principal residence exemption, says Levett.

Make it a gift: Gifting the cottage to children while the owner is still alive is another possibility. Levett says that in this scenario, owners may be subject to capital gains tax as the Canada Revenue Agency “is going to deem you as having disposed of the property.”

Levett warns his clients that in cases where an owner is gifting his or her children a cottage before they are married, absent of any prenuptial agreement, “income and increase in cottage value is included in the calculation of net family property for equalization purposes” if the child later marries and the marriage collapses. If you gift the cottage after marriage, the income and increase in cottage value is excluded in the calculation of net family property for equalization purposes, he says.

Pass it to a spouse: If an owner passes the cottage to a spouse upon death through their will, the tax on the cottage appreciation is deferred until the death of the surviving spouse, says Levett. It’s important to plan how best to fund that future tax liability, given the actual tax amount is a moving target; cottage prices have increased, particularly over the past five years in many areas of Canada. One option is to set money aside for this payment. Another is to use life insurance to pay it off, says O’Sullivan, something that can be set out in a letter of wishes or a will.

Offer the right of first refusal: In cases where the family has to sell the cottage for financial reasons, they can offer their children the right of first refusal, meaning that those children have the option to buy the cottage before any outside parties do so.

If children do not wish to co-own: O’Sullivan says that in situations where multiple children want the cottage – but they don’t want to own it together – the owner can sell the cottage on the open market or privately, with the child with the highest bid buying the cottage.

Regardless of how a cottage is managed, constant communication is necessary to ensure conflicts don’t arise, says Levett.

“It’s great for family time and special moments,” he says, “but make sure you have that conversation.”

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