Estates & Wills & Trusts

Discussing future of cottage can alleviate family disputes

By Paul Russell, Contributor

While summer is the perfect time to relax at the cottage, it may also be the ideal opportunity for families to start considering what will happen with that property once the parents who own it pass away, says Toronto wills and estates lawyer Mary Wahbi.

“Many people have a romantic notion of the family enjoying this summer property for generations to come, and everyone will be happy just like in a Norman Rockwell painting, but generally that is not the case,” says Wahbi, partner with Fogler Rubinoff LLP.

“Sometimes the parents are the glue that holds the family together, and the thought that they can simply pass a cottage to their children is more than a bit romanticized, as these arrangements often turn out badly, for a variety of reasons,” she tells

Personal issues between siblings can come to the forefront in cottage disputes, Wahbi notes. One sibling will invariably end up using the cottage more than the others, which may cause resentment.

“The biggest issue is usage,” she says. “Is it going to be a big free-for-all and everybody gets to go up there whenever they want with whomever they decide to bring as guests or is there going to be some kind of structure, such as going up on different weekends?”

Since a cottage is essentially a second home, it will require constant maintenance and repairs, so the siblings have to determine how those bills for that work will be split, she says.

Partners and spouses that come into the family also change the dynamic between siblings, Wahbi says, further complicating mutual ownership of the summer home, especially if one branch of the family has more children and uses the cottage more than others.

She suggests that the family members sit down and talk about what will happen with the cottage, well ahead of the death of the parents.

“Be sure to invite the parents to take part in this discussion, so that everyone can be involved with whatever decision is reached,” Wahbi says.

“If some of the siblings really don’t want the cottage, this is a good time to talk about how it can be passed on to those who do while arranging for the others to get their share of its value in some other way out of the parents’ estates,” she says.

Wahbi advises family members who want to continue owning the cottage to work with a lawyer on a co-ownership agreement, that will either kick in after the parents die, or have a deadline built into the parents’ wills, saying everyone has to enter into a co-ownership agreement, or the property will be sold.

“A co-ownership agreement can address all kinds of things, such as who pays for what and if the amount owed is based on usage,” she says.

It can also address capital costs, as the cottage will need updates such as a new roof and septic tank cleaning, Wahbi says.

“The agreements can specify how the cottage will be used by the various members — do you split up the weekends or the weeks, how many guests are you allowed to bring — and what kind of condition are you going to leave it in at the end of your stay,” she says.

“These issues may sound petty, but they can become really toxic in the family because people hold grievances, so these topics need to get hammered out ahead of time,” Wahbi says.

On the financial side, she says these agreements should address fundamental issues such as any restrictions on the transfer of an owner’s interest to the next generation and should contain an out mechanism such as a buy/sell clause specifying how one family member can buy out others in the future if that situation arises.

To avoid paying capital gains tax upon the parents' death, some people put the family cottage into a trust, Wahbi says, which has its own complications. “When talking about estate planning, a residential trust may be a vehicle to consider for keeping the cottage in the family for the generation to come.”

In Toronto, the principal home is usually going to have greater growth in value, so it is the one used for the principal residence exemption to shelter the gain, she says.

Capital gains have to be paid on the cottage when it is sold or passed on, based on how much it has gone up in value since it was purchased, minus the money spent on improvements, Wahbi says.

“Fifty per cent of the gain is taxable, and typically at the highest marginal tax rate that means 26 per cent of that is going to be payable in tax, so someone has to come up with the money,” she says.

If the cottage is staying in the family, there may be enough money in the estate to cover the tax, or perhaps there is life insurance, Wahbi says.

“That tax issue that has to be addressed since the use of the principal residence exemption for a trust has been really narrowed since 2017,” she says.

Whatever option cottage owners choose, Wahbi says dialogue between family members is essential, as is getting advice on the options and their financial and tax implications.

“Sit down and talk about it, and make sure everyone in the family is onside and understands what’s going to happen to the cottage,” she says.

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