As Canadians, we love the outdoors. You’ll find us kayaking down a river, snowboarding down the local slopes and hiking the local terrain. A lot of those season sports are done at the family cottage, either in the mountains in BC or the lake country in Ontario. As wonderful as cottage life is, it can also pose a stress when owners start to think about how to pass it onto their children.
If you own a family cottage and have children, the very first thing you need to do is ask them if they are even interested in using it once you are gone. Have an honest, open discussion. Millennials are a much more mobile generation than we ever were, and they are struggling enough just to come up with a down-payment for their first home. Emotions and personal implications can come into play amongst the children. Long story short, the answer may surprise you. If the next generation is interested in keeping it, there are several strategies you can use to pass it onto the children:
1. Transferring a Cottage to Your Children or Child
If there is no surviving spouse, then assets, including a cottage, are sold at their fair market value (FMV) at the time of death. In most cases, this results in a taxable capital gain to the deceased’s estate since the cabin is usually not the primary residence. The beneficiaries receive the property at the FMV and that is their adjusted cost base (ACB) for future reference. They now become co-owners of the cottage. Who the beneficiary or beneficiaries are is determined through the will. If this is your plan, make sure your kids are on board with this idea as some may be more attached to the cabin than others.
2. Make your kids Co-Owners While You Are Alive
If your child or children are all equally enjoying the benefits of summer hiking at the family cottage, then you may want to consider making them co-owners while you are alive. As ‘Joint Tenants with Rights of Survivorship’, ownership is usually divided equally amongst everyone on title. When you pass away, your share of the ownership passes directly to the surviving owners. This means the cottage is not subject to probate fees or a will. The surviving owners could now change the ownership to ‘Tenants in Common’ as they will probably want their share passed onto their significant other. (An important caveat: make sure all the children like this idea and are happy to continue using the cabin. Encourage discussions about a co-ownership usage agreement.)
3. Pass It on Before You Die
OK, let’s say you are getting on in years and the idea of flying down the ski slope no longer has an appeal and your health issues don’t allow you to enjoy it as often as you did in the past. Also, you want to avoid having your estate pay capital gains. No problem. A common solution here is to gift the cottage to your child or children while you are still alive. By doing so, you can pay the capital gains that have accrued from when you first bought the cabin to the FMV of the cabin on the date you gifted it to your child. To minimize the immediate tax hit, you can always gift the cottage over a period of years, stretching the gift over five years for example. (Note: make sure the additional income doesn’t prompt government clawbacks).
4. Create a Trust
If you are unsure about your children’s ability to properly care for the cottage financially but want to ensure they continue to reap the benefits of cottage ownership, set up a trust. A trust means you have more control over what happens, and you will be able to allocate funds for cottage maintenance. It also protects the cottage from any legal disputes, including divorce, liens and bankruptcy. This is a good option if your estate can afford this strategy.
5. Use Insurance
If you are concerned about your estate paying a huge tax burden, think about using the proceeds of a life insurance policy to cover the capital gains cost. Update your will to reflect this strategy so it states how the insurance money should be used. It can also be used to fund a trust mentioned in point number 4. Eliminating the tax burden is one way to make things easier for your Executor and beneficiaries once you are gone.
6. Transferring A Cottage to Your Spouse
Transferring a cottage to your spouse through your estate is usually only a temporary solution since it doesn’t resolve the issue of who will get the cottage in the next generation—but it can certainly be done. Under tax law, when one spouse transfers property to other spouse, there are no immediate tax consequences. This is also the case where the cottage is jointly owned. The surviving spouse will now need to consider what would become of the cottage upon their death.
Lastly, although not a strategy for passing on the family cabin to your children, you can always simply sell it before you pass away. This avoids any potential disagreements between your children afterwards on how the cottage should be managed. As mentioned above, not everyone may want the cabin or are in the same financial position to be able to afford the maintenance. No matter which option you choose, make sure you speak with a financial planner or lawyer on the advantages and disadvantages of each option as each one has it’s unique tax consequences.