The Cottage Conundrum: How to deal with a family cottage in your will
For many families, a cottage isn’t just a piece of real estate - it’s a place filled with memories, traditions and emotion. Having a family cottage is a wonderful experience, but that sentimental value can make estate planning for a cottage even more complicated. If it’s not handled carefully, it can turn into a source of family conflict.
The recent case of Drumonde v. Spellay is an example of how things can go wrong. In this case, Rose Anne Spellay owned a cottage and, in her will, attempted to set up a scheme for it to pass to her five children. Unfortunately, the will was not clearly drafted and this led to a dispute, and ultimately a court case. The court had to decide what Rose Anne’s intentions were, and fit those into a workable scheme for the cottage, which might not have aligned with what Rose Anne had actually wanted. Ultimately, this led to the cottage being sold, against the wishes of one of Rose Anne’s children.
This case underscores the importance of clear, thoughtful planning when it comes to passing on a family cottage to the next generation. If you want to keep the cottage in the family (and preserve family harmony) here are some key considerations to keep in mind:
1. Who Will Own the Cottage?
Deciding who should inherit the cottage is often the first and most difficult decision. Some families want the cottage to stay in joint ownership among the children, while others prefer to leave it to one person to avoid future disputes.
Here are some questions to consider:
Do your children all use and enjoy the cottage equally?
Are they financially able and willing to share in its upkeep?
Would any of them prefer a financial inheritance instead?
It’s okay to acknowledge that equal isn’t always fair. And that sometimes, selling the cottage and dividing the proceeds is the most practical route.
2. Possible Shared Ownership Structures
If you want more than one child to inherit the cottage, you may want to consider putting a legal structure in place to manage joint ownership. This can help prevent disagreements and clarify expectations.
Options include:
A Cottage Co-Ownership Agreement: A written agreement between beneficiaries outlining how the cottage will be used, how costs will be shared, and what happens if someone wants out.
A Cottage Trust: The cottage is held in trust for the beneficiaries, with rules for use and management.
Each option has pros and cons, so it’s important to get legal advice tailored to your situation.
3. Covering the Costs
Cottages come with ongoing costs, including property taxes, insurance, maintenance and repairs. They also require a time investment to manage and maintain the property. These commitments can cause friction if they’re not discussed and agreed upon in advance.
Some parents set aside a fund in their estate specifically for cottage upkeep. Others make it clear that the new owners will be responsible for all future costs. It’s important to come up with a plan that works for your family.
4. Capital Gains Tax
In Canada, a cottage is often considered a secondary residence, which means it may be subject to capital gains tax when it’s gifted or sold. Many cottages have increased in value significantly over the years, which can make this tax bill substantial.
To manage this, you may want to:
Get a valuation to establish the cottage’s current value and estimate the future tax liability.
Speak with a tax advisor about designating the cottage as your principal residence (if applicable).
Consider life insurance to cover the anticipated tax bill.
Clear Communication is Key
Don’t leave your children guessing about your intentions. The best way to avoid resentment or litigation is to talk to your family and come up with a workable plan.
Make sure your wishes are clearly outlined in your will, including:
Who the cottage will go to;
What legal structure will be used;
How taxes and costs will be handled; and
Any specific conditions or expectations.
You should also make sure you have power of attorney documents in place to ensure that someone can manage the cottage if you become incapable of doing so yourself.
Don’t leave it up to the courts to decide what happens to your family cottage. With thoughtful planning and clear communication, you can help ensure that your cottage remains a source of joy, not conflict, for generations to come.
If you’d like to discuss planning for your cottage, or you estate plan generally, please contact us to schedule a consultation
This blog post is for informational purposes only and is not intended to provide legal advice. If you require legal assistance, before taking any action you should contact us or another qualified lawyer to discuss your situation.
