Planning helps avoid family fights over the cabin
Parents shouldn’t assume their children will ‘ work things out’ once they’re gone
While the family cabin is often home to fond memories, sharing it with family can also create plenty of headaches.
Allison Marshall comes across families squabbling over cottages often in her job as vicepresident, financial advisory support at RBC Wealth Management.
“Many of our advisers call us with conflicts or issues that have come up with planning for the family vacation home,” Marshall said. “Our clients tend to think that the family cottage is a place that everyone enjoys and parents tend to assume that after they pass away, everything will work itself out and that the rest of the family will want to keep the cottage and continue to use it as it has been. They don’t realize that there can be conflicts, which can sometimes spiral into bigger issues.”
Marshall says advance planning can help both with coowning a cabin and with how to manage passing a cabin from one generation to the next. She suggests using a lawyer with experience in recreational properties and co- ownership agreements to write up an agreement covering everything from who gets the cabin on summer long weekends to whether or not teenagers can use the cottage unsupervised to what happens to the cabin when one of the owners dies.
Vancouver lawyer Gail Davies has written many co- ownership agreements, and has also developed a recreational property — the Oswego Hotel in Victoria — that is all strata- owned.
The co- owners can enter into a co- ownership agreement which can govern usage times, sharing of expenses, sharing of revenues ( if rented out to the public), what happens on the death of one of the owners, what happens if one owner wants to sell and the other doesn’t, what happens in the case of other disputes, and many other issues, Davies said.
Marshall said the most important thing is to sit down together before any problems arise and get an agreement in writing, whether it’s just about usage today or about what to do when the owners die.
“It’s important to have the discussion to find out who is interested and who is capable of maintaining a property from a financial standpoint, and it’s good to get it in writing when Mom and Dad are there,” Marshall said. “If you have Mom and Dad’s influence, it can be helpful so that they have peace of mind that the kids have agreed. Unfortunately, a lot of the time, that planning hasn’t taken place.”
The death of a cottage’s owner or co- owner can be very complicated because sometimes siblings do not agree about the future of the property or they can’t all afford to continue owning it.
When a cottage that is not a principal residence is passed on in a will, capital gains taxes on the increase in the property’s value since ownership began become payable by the estate. Property transfer taxes may also apply.
“If the estate doesn’t have sufficient assets to cover the cost of the tax, then the kids could take out a mortgage on the property to pay the tax for the estate,” Davies said. If the kids don’t have the financial resources to cover a mortgage, they might have to sell the property or subdivide it and sell pieces of it to cover the capital gains taxes.
There are some other options, but they all involve planning ahead, Marshall said.
“In some cases, we have done planning with some clients where the parents purchase a life insurance policy, and the purpose of the insurance policy is to pay the taxes when mom and dad pass away,” Marshall said, but added that the person must be insurable from a health perspective, and depending on the person’s age, the cost might be prohibitive.
Other options include setting up a family trust or adding the children to the title as joint tenants, but both will trigger taxes.
With a family trust, the parents sell the property to the trust, which owns it until the descendants decide they want to sell. Adding the children as joint tenants is another option, but Davies said it doesn’t always work well.
“One problem with this can be that the parents lose the sole decision- making power with respect to the property and their children have to agree to and sign things like rental agreements, mortgages and sale papers,” Davies said.
Other options include one sibling buying out the others, or subdividing the land into separate lots, Marshall said, but ultimately it may be necessary to sell the cabin if everyone doesn’t agree or have the money to keep the family getaway.
She said she’s seen many situations where it doesn’t go smoothly.
“It comes up time and time again that clients haven’t planned for the transition of a family property and they’re calling asking for advice on how to deal with the conflict,” Marshall said. “Sometimes it ends up that the best solution is to sell and it’s a shame when these typically hold a lot of memories. You don’t want it to get to that point.”