Cottage Reflections

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Ask about our mortgage options for cottages today. Social icon Rounded square Only use blue and/or white. For more details check out our Brand Guidelines. Successful succession B Y J E N N I F E R M C F E E The family cottage can be a place of solace where memories are made to last a lifetime. B ut when the time comes to pass the cottage along to the next generation, the potential for conflict compounds. Treena Nault, executive financial consultant for Nault Group Private Wealth Management, said the complications mainly stem from family dynamics. "People grow up at their cottage. It's a very emotional place where there's lots of memories," she said. "Very often, families have multiple children and some want the cottage or can afford it and others can't. Parents ultimately want to treat their children fairly, so they wonder if they have enough money to give the same type of inheritance to each child." Another concern stems from the issue of capital gains that will need to be paid. "Many cottage owners today have owned their cottage for a very long time," she said. "The fact that those cottages have grown so much in value is another part that people will need to take into consideration. Who is going to pay the tax?" Another pitfall occurs when parents name their adult children as joint owners of the family cottage. Nault advises against this idea since issues arise about control of the cottage, as well as possible complications that could result from divorce. "If siblings are going to inherit or buy together, I definitely recommend creating a cohabitation agreement with a lawyer that outlines exactly how it's going to work," Nault said. "It should include information about what happens if a marriage breaks down and what the terms are. Is one sibling paying for the repairs and the other one doing them? There is a lot to consider." To help mitigate potential misunderstandings, Nault encourages families to talk openly about the topic. "The first step is to set up a family meeting and find out if your assumptions are correct about who wants the cottage. Sometimes with the newer generations, they like going out there but they don't want to maintain it or worry about all the costs that come along with it," she said. "If somebody raises their hand and says they want the cottage, you should have the honest conversation about whether they could actually afford to keep it." To help wade through muddy waters of cottage succession, Nault recommends enlisting the expertise of a certified financial adviser with knowledge in estate planning and capital gains, as well as a lawyer and an accountant. "There are solutions. We can get people through this," she said. "I see the worst come out in people sometimes when it comes to estates. When it hasn't been properly laid out, then there are arguments. You don't want your kids' relationships to break down because it wasn't done properly." Shawn Friesen, tax partner for BDO Canada LLP, agrees that it's often challenging to keep a cottage in the family. "You see the financial side of it and then you see the emotional side of it too — and sometimes they don't mesh. Many times, the taxes on succession planning can be quite challenging too. If you need to pay a tax bill, where is that cash going to come from?" he asked. "If somebody passes away and it's going to anybody else but their spouse, there's going to be a tax bill. The same logic applies if you sell. The difference is that if you're selling to a third party, you've got the cash to pay the tax. If it stays inside the family, you might not have the liquid cash on hand to pay the taxes." Like Nault, Friesen recommends working with a lawyer to draw up an agreement. "If you sell it to a family member, is it going to be that person's property wholly or is there an expectation of sharing it? If you don't have clear expectations of usage and responsibilities that are laid out in advance, it can get tricky," he said. "Sometimes lawyers might introduce the concept of trust where it's put into trust for the benefit of others. It's controlled by trustees who are responsible for the upkeep and maintenance but they don't own it." No matter what each family decides, Friesen suggests they iron out the plans in advance. "With succession planning, if you can lay it out while mom and dad are alive, it's a lot easier to deal with than if it's a surprise for the kids. Maybe they won't agree with their parents' logic and there's all the emotions when they find out afterwards. It can save a lot of arguments if you set up agreements about usage, expenses and upkeep in advance," Friesen said. "Honestly, the easiest thing is to just sell the cabin, pay the tax and distribute the cash. But, of course, that ignores the big emotional ties. It can really help if you can come up with a consensus as a family." "If siblings are going to inherit or buy together, I definitely recommend creating a cohabitation agreement with a lawyer that outlines exactly how it's going to work." – Treena Nault, Executive financial consultant for Nault Group Private Wealth Management Shawn Friesen, tax partner for BDO Canada LLP, and Treena Nault, executive financial consultant for Nault Group Private Wealth Management, provide expert advice on succession planning.

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