Cottages and families go together like ice cream and cones – but how do you lick the issue of keeping your cottage in the family in years to come?  It’s easy to assume that the family retreat you’ve all enjoyed for so many years will simply be passed on to your kids … and to their kids … and so on.  But easy assumptions don’t necessarily translate into easy resolutions.  Here are a few things you should consider now so your cottage will stay in the family for a long time to come:

·        Talk about it.  Your adult children have enjoyed your vacation property for years, but owning and maintaining it are much bigger responsibilities.  Talk to your children to find out who is willing to accept the responsibilities accompanying ownership.  Then make arrangements to ensure the children who want the property will inherit it, while your other children receive other assets in an even-handed way that will prevent family squabbles or, perhaps, the forced sale of the property.

·        Plan for it.  Don’t let taxes spoil future family cottage vacations.  Unless you’re passing assets to a spouse, when you die you’re deemed to have disposed of your capital assets at fair market value.  That means your estate could face a significant capital gains liability if your cottage property has appreciated in value.  You can choose to claim the principal residence exemption on one property at any time – either your cottage or city home – but the other will be subject to tax on its increase in value.

If you leave the property to your children in your will, there will be tax consequences when you die.  Instead, you could choose to transfer the property to your children – either as an outright gift or by making one or more joint owners of the property (with or without you as joint owner).  Or you can transfer the property as a trust, with your children as beneficiaries.  Each of these transfer options will trigger an immediate capital gain when the transfer is made but, depending on how the transfer is made, any future capital gains on the property will accrue to your children and are not payable until they sell or transfer the property.

·        Pay for it.  One good way to cover capital gains taxes on your vacation property – and any other estate debts, as well – is with permanent life insurance.  The death benefits are usually tax-free, and can be used to cover your estate’s tax bill.  It’s an effective strategy for providing a ready source of cash so your executor (liquidator in Quebec) won’t be forced to sell estate assets, such as your vacation property, to pay taxes.

Your wishes for your family cottage – and the means to achieving them – should be coordinated in an estate plan within your overall financial plan.  A professional financial advisor can help you analyse the options and make the right choices for your situation.