Be it a cottage, camp or cabin—the family recreational property is generally a source of amazing family memories but it can also be the cause of incredible family discord.
Growing up in Ontario, I was fortunate to be able to spend summer weekends at our family cottage. The property has been in my family since the 1930s and in the 1960s, my parents purchased a second small cottage a few doors down as our family expanded.
After seeing many families implode over internal squabbles, my father turned his attention to estate planning, since he never wanted to see a rift between my sister and me over the care, maintenance, access rights, time commitment and key decisions of such a beloved property.
My sister lives in Minneapolis and while she brings her family once a year to the lake, it was decided that when our parents pass on, the cottage will form part of my inheritance. My sister will in turn receive a larger portion of any remaining assets or investments. This arrangement has been shared with and agreed upon by all parties, so we are in a good place. The Oak Lake Olympics will continue for many years!
But what happens if a situation like this is not so easily resolved? Here are some potential conflicts that can arise when planning doesn’t happen in advance:
- What if the children who inherit the cottage are not interested in or able to manage all the details and pay for the maintenance and work involved? We have two very modest cottages, yet the bills add up to more than $25,000 a year. Some families might rather spend the annual cost of maintaining the cottage on an elegant, stress-free vacation.
- What happens if only some of the family contribute to financial costs and physical upkeep of the property but all expect the same access, even while the inheriting family grows?Opening and closing seasonal properties requires more work than just relaxing on the dock in the summer. How should the costs be split: evenly, or based on actual usage?
Here are two high-impact options that families can consider to address the cottage, camp or cabin situation:
Option 1: Set up a Family Trust to own the cottage and realize the many benefits:
- Provide succession planning involving gifting ownership of a cottage from parents to children while still enabling the parents to use the cottage.
- Facilitate management of the cottage (i.e., issues such as access right to the cottage and payment of ongoing cottage expenses), especially where numerous individuals and/or generations are involved.
- Offer significant tax minimization at death for the existing owner of a cottage since future increases in the value of the cottage will not accrue to the existing owner if a trust is used.
- Reduce probate fees related to the value of the cottage as a result of the death of the existing owner.
Option 2: Establish a Family Vacation Trust to pay for their family’s future summer vacations. A Family Vacation Trust would allow the family to continue to enjoy annual vacations and/or a cottage experience without the responsibility and costs of maintaining a recreational property. After selling the cottage and transferring the proceeds to a Trust to be invested, the annual disbursements can be used for family trips, cabin rentals and other family adventures. Key benefits of this option are:
- Probate fees will be avoided when one of the co-owning family members passes away.
- The trust funds are protected in family breakdowns such as divorce or bankruptcy, as the investment portfolio is legally owned by the Family Vacation Trust, not by individual family members.
- If the capital gains generated by the investment portfolio are harvested each year and allocated to family members on a tax-efficient basis, this deemed sale would result in only nominal income taxes every 21 years when it is assumed at the investment assets held by a Family Vacation Trust are sold, which triggers capital gains tax.
If your family owns a recreational property, I recommend property-related discussions happen long before the final reading of the will. It is best to engage your family in a discussion of how to pass the property to the next generation in a fair and meaningful way. This can help avoid family conflict, future litigation and remove any unnecessary element of chance or luck in the cottage’s future ownership.
For more information, contact:
Danny Zich, Estate & Trust Specialist | 250.713.0172 | firstname.lastname@example.org