Cottage Succession

Passing Down the Family Cottage

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Cottages often hold a lot of sentimental value to families and are home to a lot of great memories.  Many cottage owners would like to see their children and grandchildren get the same joy from the property that they did, even after they are gone. It may seem like a nice sentiment but leaving the cottage to your family is no walk in the park.  There are tax implications that come with passing it down to your children, and if they aren’t dealt with appropriately, it can be a severe financial burden to both you and the kids.

What You Need to Know

There are a variety of ways to leave a family cottage for the next generation, but the following are three straightforward and cost-effective ways to do so:

  1. Gift It While You Are Still Alive

This strategy may work well for you if you no longer want to use or wish to have control over the cottage. By gifting it while you are alive, you can personally deal with any capital gains associated with the sale.  The tax burden would fall to you instead of your kids, and they will not have to worry about a tax bill when you die. It may be prudent to consider gifting the cottage over many years, therefore spreading out the tax burden.   It is important to remember that with this strategy, you give up control of the property. That means your child could sell it or it can become an exposed asset in the event of marriage breakdown.

  1. Life Insurance

Perhaps one of the easiest ways to tackle the taxes on your cottage is to purchase a life insurance policy.  The proceeds of the insurance can be allocated to deal with any taxes or expenses that arise from your death.  After the life insurance deals with the tax burden, the cottage can be passed down to your heirs without any significant cost to them. This strategy allows you to have control of your property until you die and enables it to pass easily to your children.

  1. Just Sell It

Selling the cottage isn’t even an option in many people’s eyes, but sometimes it may be the best choice.  People often assume their child will want the cottage when they die or if they have multiple children that they will be able to share it amongst themselves peacefully. Unfortunately, that is not always the case.  Your children may not be interested in taking on the financial burden of running a second property and having your children share the property may be a disaster waiting to happen. It could be in the families’ best interest to have the cottage sold when you die. Once the taxes and transaction expenses have been paid from the proceeds, the remainder of the cash can be given to the children to do with what they wish.

Passing down a cottage is not always a smooth process. It is important to discuss with your children if they desire to own the cottage in the first place. If they do, it is essential that you work with a tax professional to ensure that your property gets handed down in the most tax efficient way possible.

It is also important to remember my golden cottage rule. The mortgage payment will be the least taxing expense once you own a cottage.  I have had many clients question my theory when they have a mortgage payment of $1,800 a month and cannot figure out what other expenses there will be to own their new piece of paradise.  Once they double up on all their belongings and then tack on the cost of insurance, phones, boats, paddle boards, you will quickly to see that ownership can be an expensive proposition. Not to mention the endless projects and additions to fill your idle time. There’s also that floating dock your wife will want to build for the kids, which they will rarely use. However, when you are relaxing in your favorite chair watching the perfect sunrise or sunset, and a sense of peace comes over you, you realize it’s all worth it.

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Kevin Anseeuw is a Winnipeg-based investment & financial advisor with Harbourfront Wealth Management. His specialty is working with Business Owners.

Disclaimer: The views expressed are those of Kevin Anseeuw, Certified Financial Planner, and Investment Advisor, and not necessarily those of Harbourfront Wealth Management Inc., a member of the Canadian Investor Protection Fund.