By Peter Sproule, CFP, CLU, CHS

Certified Financial Planner, Momentum Financial Services Inc.

Owning a cottage can be a cherished family tradition, but it also comes with unique challenges when it comes to estate planning. Whether it’s navigating tax implications, ensuring fair distribution among beneficiaries, or preserving the property’s sentimental value, careful planning is essential to protect your legacy.

Here’s a comprehensive look at some typical challenges and considerations, along with practical steps and scenarios to guide you through the process.

Typical Challenges and Concerns

  1. Taxes & Probate Fees

Owning a cottage as a secondary property means it’s subject to capital gains taxes upon sale or deemed disposition, which can occur upon the death of an owner or transfer to a non-spouse party. In Canada, 50% of a capital gain up to $250,000 is included on personally-held property, and capital gains over $250,000 are included at 66.33%. Probate fees in Ontario, are currently set at 1.5%. On a family cottage that was acquired for $500,000 and is now valued at $1,500,000, the capital gains taxes for an Ontario family in the top marginal tax brackets would $357,045.10, with probate fees being an additional $22,500.00. In total, passing the cottage (at death) would cost $379,545.10.

  1. Estate Equalization

Not all beneficiaries may be interested in inheriting a cottage, which can complicate the equitable distribution of an estate. Cottages require ongoing maintenance and lack the liquidity of financial assets, necessitating strategic planning to ensure fair outcomes through tools like life insurance and differentiated beneficiary designations.

  1. Continuity of Ownership & Protection from Relationship Breakdowns

Maintaining ownership continuity across generations can be challenging, especially with sentimental assets like cottages. Establishing a trust may be necessary to shield the property from creditor claims or family asset divisions during relationship breakdowns.

  1. Lack of Liquidity in Estate

Capital gains taxes and probate fees are typically paid from the estate, which may lack sufficient liquid assets. This shortfall could force the sale of the property to cover tax liabilities, potentially conflicting with the benefactor’s goal of passing the cottage to heirs. In the above example, if the estate or beneficiaries were unable to pay the $379,545.10 in taxes and probate fees, they would be forced to sell the cottage.

  1. Lack of Resources for Maintenance and Taxes

Even if the estate has enough liquidity for immediate tax obligations, ongoing maintenance and property taxes may strain beneficiaries’ finances, posing a long-term challenge to keeping the cottage within the family.

Where to start

Before putting any strategies in motion, it’s important to understand the basic goals you are trying to achieve and the landscape around you. Estate planning for assets with sentimental value is more about providing options to the beneficiaries instead of imposing your ideals, especially if those beneficiaries have differing priorities.

  1. Benefactor’s Goals. Determine whether the goal is to preserve the property’s sentimental value or pass on its financial worth to beneficiaries.
  2. Beneficiaries’ Engagement. Assess whether beneficiaries are interested in maintaining the property or prefer liquid assets, and their capability to manage ongoing responsibilities.
  3. Beneficiaries’ Dynamics: Understand the dynamics among beneficiaries to ensure a cohesive plan that respects everyone’s preferences and capabilities.
  4. Calculating Fairness: Recognize that gifting a cottage is not equivalent to gifting cash due to differences in tax treatment and ongoing costs.

Starting the conversation

Half of the battle can be starting the conversation, which can be an emotional one. Below are starting points on what you need to consider when talking about cottage transitions.

  1. Clarify Goals: Clearly define the benefactor’s intentions and assess beneficiaries’ readiness to accept and manage those goals.
  2. Assess Financial Impact: Determine the property’s value, calculate potential tax liabilities, and evaluate the estate’s financial ability to cover them.
  3. Plan for Equitable Distribution: Develop a framework for distributing assets that accommodates differing beneficiary needs and preferences.
  4. Review Existing Legal Documents: Regularly review wills, trusts, and insurance policies to ensure they align with current intentions and circumstances.
  5. Create a plan: After examining your goals, your benefactor’s goals, and your current financial structure, work with your professionals to determine the strategies that work best for your family in achieving your legacy.

Estate planning for a cottage requires foresight and strategic thinking to overcome the unique challenges it presents. By understanding your goals, assessing beneficiary dynamics, and planning for financial contingencies, you can ensure that your cherished family retreat remains a source of joy and unity for generations to come.

With a complete understanding of the importance of estate planning and you can ensure that your family cottage passes securely to your heirs. Contact Momentum Financial Services today to start taking advantage of our expert estate planning services.