Estate Planning for the Family Cottage

One of the quandaries many people face when making an estate plan is what to do with the family cottage or vacation property. The family cottage is often a beloved family asset – a place where several generations have shared many happy memories – and there is often a strong wish to keep the cottage in the family. The best way to accomplish this is one of the more challenging issues in estate planning. The plan will need to consider income tax and property transfer tax, how ongoing maintenance and upkeep will be funded, who will get to use the property and how decisions will be made, among other things.

There is no “one size fits all” solution for every person wishing to transfer the family cottage to the next generation. Some options include making an outright gift of the cottage, selling the cottage to family members, or creating a non-profit society or a trust to hold the cottage for the use of family members. Each of these options has some advantages and drawbacks, but one of the more attractive options for keeping the cottage in the family is to create a trust to hold the cottage.

A “cottage trust” can be created either during lifetime or upon death to allow all family members to enjoy the use of the cottage. Even family members who have not yet been born at the time the trust is created can become beneficiaries because, in British Columbia, trusts can exist for up to 80 years. Since trusts can be created with a wide variety of terms, a cottage trust can be customized to suit the needs of each particular family and will provide a set of rules to govern such things as who will make decisions, how the cottage will be used by the family and how the expenses of the cottage will be funded.

Income tax will likely be payable when the property is transferred to the trust, but once the trust owns the cottage, the death of any particular beneficiary will not be a taxable event. Every 21 years the trust will have to pay capital gains tax on any appreciation in the value of the cottage, so this potential tax liability will have to be properly planned for if the trust is going to exist for longer than 21 years. If the trust is created upon death (through a person’s Will) then it will get some additional favourable income tax treatment.

While the cottage trust may take some careful thought in setting it up, it can be a good solution when the goal is to keep the cottage in the family for several generations.

For more information on related matters, contact Melodie Lind who is part of our Tax Law Group at: [email protected] or (250) 869-1210

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