A family cottage is, above all, a retreat for much needed rest and relaxation. In our experience, far too many people fail to grasp the personal, legal, financial and tax implications of ownership, especially when the property is likely to be passed to future generations – which it almost always is. It’s a problem we have helped family members address several times in the past.
This is the first of a two-part series intended to help families prepare for a transition challenge which, when managed without the necessary expertise, can cause unintended emotional distress and damaging financial consequences. The two most frequently raised issues are: sharing a cottage and passing the cottage to future generations.
Sharing a cottage
While parents are alive and involved, they usually provide the leadership and guidance about cottage-related matters for the family. If there are competing wishes for usage periods or different ideas for improvements, the parents will normally make the final decision. From habit and respect, children generally go along with these preferences and cottage life proceeds peacefully.
When parents are no longer involved, differences of opinion may escalate to disputes. If all children are equal owners, no one can outvote the other. An extreme example: a disgruntled child may decide to sell his or her interest to a third party to be rid of the problem, or even force the sale through court action. Here are our thoughts about tackling the pressure points.
Consider creating a Cottage Agreement
A Cottage Agreement negotiated and implemented while the parents are active can make all the difference between a short and unhappy period of sibling ownership, and a stable and continuing structure for future generations to enjoy the cottage.
The Cottage Agreement fulfills two important purposes:
It is a transition vehicle, safely passing the cottage ownership and control from one generation to the next, retaining the rights and pleasures of the parents while ensuring that the children will be the stewards for the next generation.
It is a structure for the children when the parents are no longer involved in the cottage, ensuring that the financial responsibilities, sharing usage issues, division of labor and a fair, mutually agreeable method of dispute resolution are in place.
Sharing the joy
With shared usage comes the need to address some significant questions, such as access periods, the bringing of friends as guests and, if relevant, rental options in circumstances where a child cannot use the cottage personally. A Cottage Agreement helps mediate these and other problems in advance, and in writing.
Sharing the burden
Even in the happiest of families unanticipated logistical issues can create friction. Who will open and close the cottage? Who is responsible for making sure the utility bills, municipal taxes and insurance premiums are paid on time? A Cottage Agreement is a perfect who-does-what list and, in the event of disagreement, dispute resolution device.
Sharing the costs
Not all the children have equally deep pockets. When the septic system goes kaput, who pays? A brother may be able to pay his share easily, while his sister may be too strapped to contribute. A Cottage Agreement can neutralize a potentially negative family dynamic by making an agreed financial provision for unanticipated expenses.
Keeping it in the family
A critical goal is to retain the cottage for future generations. Depending on family goodwill can lead – we have discovered – to costly and damaging financial and emotional mistakes. A Cottage Agreement can effectively address the inevitable legal, financial and tax consequences of inheritance.
The Cottage Agreement discussion process will sort out the tasks, fairly distribute the burdens, ease constructive decision-making, and reduce possible resentments. And, most important, a Cottage Agreement provides a structure to deal with these issues in a fair, predictable and business-like way, minimizing discord and preserving harmony.
Expert legal assistance to start the process and keep it heading in the right direction saves time, trouble and increases the chance of success Please contact me personally for advice on your cottage transition challenges:
Geoff Funke, Senior Wealth Advisor, Scotia Wealth Management, 604.535.4721.
This article is intended as a general source of information and should not be considered as personal investment or tax advice. We are not tax advisors and we recommend that individuals consult with their professional tax advisor before taking any action based upon the information found in this article.