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Five questions to ask before planning your estate

planning cottage estate

The cottage is our happy place. It’s a respite, a place for families to bond, and a getaway that brings the generations together. But two words can quickly cancel all of that serenity: cottage inheritance.

The fight over the family cottage isn’t just a plot device in the movies. Squabbles and misunderstandings over holiday property are common—and can often open up rifts in otherwise caring families. So what’s the best way to avoid the drama? As with most things, communication is the key.

“Not having the conversation can force those conversations to happen at a later date when people are already grieving or in crisis, not the ideal emotional time to have the conversation,” says Leanne Kaufman, RBC’s Head of Estate and Trust Services. “It can also get nasty.” Kaufman notes that having an open, honest conversation about what will happen with the cottage when its owner passes away is the best way to prevent misunderstandings later.

Communicating early on can help prevent people from making unfounded assumptions. So to help out, here are five questions you should ask while estate planning to make sure the cottage remains your happy place, no matter what happens.

Have you set clear expectations?

Every member of your family may think they know what’s going to happen to the cottage when the owner dies, but in reality, they each may have a vastly different vision.

“Maybe it’s always been the parents’ dream to sell the cottage and travel the world—do the kids know that?” asks Kaufman. “What are the kids’ assumptions and wishes? Is there an expectation that they will share it? [What if you learn] that only two of the three children are interested in it?”

Taking over the family cottage may be a dream for one family member and a nightmare for another. In some families, it’s expected that the cottage will be sold after the owner dies, and in others, the traditions and trips to the lake are expected to live on for generations. But the only way to know for sure is to talk things over. That way, no one ends up with less (or more!) than they were expecting.

How will the cottage be funded going forward?

Even after a property is handed off to another person, there are lots of ongoing financial factors to consider. Cottages have operational costs, and if you don’t think ahead of time about how those costs will be covered, the new owner of the cottage may find themselves in over their head. “It might make sense, as part of the estate planning, to set up some sort of a trust fund for ongoing maintenance and repairs,” says Kaufman. “You may need to think about that in the estate-planning stage rather than leaving it for the next generation to worry about.”

You might also want to consider creating a co-owner agreement or something like a shareholders’ agreement ahead of time. That way, the co-owner will have a clear idea of what they’re in for, Kaufman says, “before the transition happens, before the crisis hits.”

Do you understand how the cottage will be treated from a tax perspective?

Nothing in this world is certain except death and taxes—and estate planning combines both. So when you leave your cottage to someone, it’s probably a good idea to have a clear picture of what taxes you’re also leaving them. “If proper attention isn’t paid, it could have unintended consequences,” says Kaufman. For example, while there is no inheritance tax in Canada, a person who inherits property can be subject to capital gains tax. Or, “if the cottage is left outright to one or two children but the rest of the estate is left to all the children, you could have the non-owning child paying the tax on the cottage. There are complexities there.”

Kaufman always recommends that people who are planning their wills should do so under the advice of someone who specializes in estate and trust issues, both from a legal and tax perspective.

Should you consider transferring ownership of the cottage before death?

Want to avoid the complications of inheriting a cottage? Then perhaps you should look at not inheriting a cottage. That is, perhaps you want to consider transferring ownership while everyone’s still alive. As Kaufman notes, “That could be direct ownership to the next generation, joint ownership with the next generation, or directly to a trust, so the trust continues for the next generation.” Whichever route you take, Kaufman stresses that the most important part is dealing with it ahead of time, to avoid difficult conversations and upsetting family dynamics later. “Ignoring it isn’t really a solution.”

Have you fully considered the sentimental value of the property?

When you’re planning your estate, it can be easy to start to think of everything in dollars and cents. But a cottage is often meaningful in a way that other possessions aren’t—which is why it can so often lead to conflict. “Cottages tend to be the most emotional estate asset,” says Kaufman, noting that deciding what to do with a cottage after the owner passes away can create challenging situations for many families.

“Every estate litigator I ever talked to says their first piece of advice is sell it,” Kaufman laughs. And while that might be the simplest answer from a legal and financial perspective, it ignores the deep emotional ties that family members may have to the property. So before you make a decision about what to do, consult with your family, and get a full vision from the people who love the place as much as you do.

“[The cottage] is not always the most valuable asset, but it might be the most sentimental,” says Kaufman. “It’s not always about the dollars.”

 

To learn more about planning your cottage estate, visit rbcwealthmanagement.com.