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Cottage goers enjoy the cottage experience in Muskoka (Kevin Van Paassen/The Globe and Mail)
Cottage goers enjoy the cottage experience in Muskoka (Kevin Van Paassen/The Globe and Mail)

Tax Matters

Talk to the kids before leaving them your cottage Add to ...

As I was sitting on the dock at our cottage last week, Jennifer, another cottager, came over to chat. "Tim, I've come to the conclusion that happiness is having two loving, caring brothers - who live very far away," she said. "When we're together here at the cottage they drive me crazy. I've learned to cope by only dreading one day at a time rather than thinking about the entire next week."

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As it turns out, Jennifer's parents had just announced to the kids that they planned to transfer the cottage into the names of Jennifer and her two brothers, Jason and Jack (not their real names). The initial reaction of the siblings was positive, until Jack spoke up and suggested that they build an addition on the place and that each of them should come up with $30,000 to contribute. Then the fireworks started.

The problems

Jennifer explained that she prefers to visit different destinations and would only use the cottage one or two weeks each year. She has no interest in spending $30,000 to build an addition, not to mention that this financial commitment is too big for her.

"Have your brothers thought about the costs of maintaining the cottage?" I asked. "There are property taxes, utilities, and don't forget the cost of the toys - the boat, personal water craft, the wakeboards, tubes, and all the rest of that stuff. And even if you don't build an addition, it'll still cost money to paint, repair the lawn tractor, put new boards on the deck, re-shingle the roof every few years - and a lot more," I reminded her.

"I'm not sure how Jason and Jack will agree to split up time at the cottage," Jennifer explained. "Jack lives an hour away from here, but Jason lives in the U.S. and can't make trips here as often. Then, there's the fact that my parents still want to use the property for a good part of each summer while they're still healthy."

"Jennifer, I also notice that Jack loves to come to the cottage and work the whole time he's here. He loves to make repairs and keep things in order. But I don't see Jason the same way. He seems to want to just relax when he's here," I observed. "Exactly," she agreed. "I could see Jack getting really frustrated with Jason over that."

The lessons

There are a few lessons to be learned here. First, Jennifer's parents made a decision about the cottage ownership without speaking to the kids first. They don't understand the desires of the kids. It's critical to talk to your children about any second property to ask whether the kids really want to own it. Will they use it as much as you? Do they have a desire to be part of the community where that property is located?

Keep in mind, when kids end up owning a property together, it's usually important that they equally control ownership, occupancy, financial decisions regarding the property, and any decision to sell. And, they should share equitably in any eventual gain on the sale.

This won't always be possible. Sometimes kids simply can't agree, or may not have equal financial means to contribute to the maintenance of the property. If this is the case, it may be best they don't end up owning the property together. This might mean just one or two own the property. But your children will want to be treated equitably and fairly as far as your estate is concerned.

As for Jennifer and her siblings, it turns out that Jack is the only child who really has a desire and the means to own the cottage in the long run. Their parents would be wise to consider transferring the property to Jack alone at some point, but to equalize things by transferring other assets to Jennifer and Jason - either upon death or while they are still alive. Life insurance can be a great equalizer where there aren't sufficient other assets to transfer to the kids who won't be receiving the cottage or other property.

Finally, I'm a big fan of not transferring ownership until death in many cases. This avoids a potential tax hit that can arise when making a transfer today, allows parents to maintain use and control today, synchronizes the time at which the kids will each inherit their share of the estate, and is a simple solution. Still, the kids should be aware of what the plan will be, and should have the opportunity to provide input.

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