As cottage season looms for so many Ontarians, many retired or aging cottage owners are becoming weary of the work and expense that goes into cottage ownership and are considering how to unburden themselves of these responsibilities.
There is often a desire to preserve the cottage property and keep it in the family, particularly if there are adult children and grandchildren who frequent its use or a common law partner who is attached to the cottage property.
Estate administrators are full of advice as to how to transition the cottage from one generation to the next. They have strategies to avoid or defer capital gains tax and often suggest setting up a trust or a co-ownership agreement between adult children to allow them to enjoy the cottage property in perpetuity.
Estate litigators on the other hand are cautious about trust arrangements and warier about co-ownership agreements particularly where a cottage owner’s will may not align with such arrangements or there is a common law spouse who was not sufficiently provided for by a deceased cottage owner. Most estate litigation as between siblings and other members of the family is driven by decades of suppressed resentment concerning perceived preferential treatment by various members of the family after an estate is formed.
It is rare that parents or common law partners want to leave their family with a messy and expensive estate dispute that will poison whatever relationships remain between family members and common law spouses. However, many of the estate planning strategies that are employed to pass the cottage property on to the next generation feed into potential estate litigation.
Preserve the cottage property?
Estate planning strategies often involve parents having an “honest” discussion with their children as to who wants the cottage property, who can afford to maintain the cottage property and whether they want to keep the cottage property in the family.
The problem with such discussions is that they are sometimes not so honest as children are reluctant to express their true feelings knowing that their parents desperately want to see the cottage remain in the family for generations to come.
Sometimes these family discussions will lead to a situation where one child says they want the cottage and the others say they do not, either because they know they could not co-operate with the child who wants the cottage or because they know they could not afford the obligations.
Through “honest” discussions, cottage owners may consider transferring their interest in the cottage property for “natural love and affection” to one child and to put a corresponding gift in the will to the other children in an attempt to make things equal.
This strategy does not always work to avoid estate litigation because it is difficult to “make things equal” while one is alive and without knowing when one will die. One issue that arises, of course, is that one child is receiving their inheritance ahead of the others. Another issue that arises is the valuation of the cottage property. There is a natural desire to minimize the value so as to reduce capital gains payments and to avoid penalizing the cottage receiving child by placing too high a value on the cottage property.
A beneficiary who learns of the additional amount they will be receiving in the will years later will undoubtedly be resentful if the cottage property that his or her sibling received has gone up in value substantially over the years.
Issues as to whether cottage owners were unduly influenced in selecting the value can arise even though such questions can be exceedingly difficult to litigate. Competency issues may also be alleged if the value ascribed is not supported well in some manner.
Sell the cottage and move on?
A better strategy to pass on the cottage property, if funds are available, is to have the cottage properly valued by way of appraisal and offer family members to purchase the cottage property together. If no one is interested, it may be best to sell the cottage property and enjoy the benefits of the proceeds with a view to equally dividing the estate among their children (and consideration for any dependants, including common law spouses).
Cottage property owners need to determine whether it is realistic to expect family relations to continue harmoniously if they are forced to co-operate over maintenance, improvement and timesharing issues year after year with respect to the cottage property. While it may be a lovely dream to keep the cottage property in the family, solicitors should present the option of simply selling the cottage property and requiring family members to purchase their own property if that’s what they really want for their future.
Years of estate litigation and ruptured relationships within the family could be avoided by such a strategy.
This article was originally published by The Lawyer’s Daily, part of LexisNexis Canada Inc.
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