Cottage owners enjoy many benefits from their piece of paradise. Family memories, rest, relaxation, and the chance to enjoy the outdoors are great things about owning a cottage. However, deciding what to do with it can be challenging as owners age. You might want your kids to inherit the cottage, so it’s best to prepare for possible pitfalls.
Leaving the Cottage to the Kids
Before making a concrete plan, ask your children whether or not they want a family cottage inheritance. Some families want to keep it as a legacy, while others can’t because of practical reasons like ongoing maintenance costs or they don’t live near it. If you have more than one beneficiary, some may want the cottage while others don’t.
If you decide to pass your cottage to some or all of your heirs, there are some essential things to be aware of. Once you know the possible challenges your beneficiaries may face, you can take action to minimize or eliminate them.
Capital Gains Tax
If your cottage is not your principal residence, any increase in value between your purchase price and current market value is typically subject to the capital gains tax if you sell it or pass it down in your will. Inheriting a cottage in Ontario can result in a significant tax bill, depending on when you bought the property.
Planning for the capital gains tax is essential because if your beneficiaries can’t afford to pay it, they may have to sell the property. Some ways to manage the tax are:
- Talk to an accountant to get an estimate of how much tax will apply
- Consider options to minimize the tax, such as:
- Selling your principal residence and making the cottage your principal residence.
- Transferring ownership to your heirs over several years.
- Making your heirs joint owners.
- Setting up additional funds in your will to cover the costs of the cottage.
Each option carries legal and tax implications, underscoring the importance of seeking advice from professionals such as tax accountants, lawyers, and financial planners. Their expertise will guide you on how each strategy can affect you and your heirs, providing the reassurance you need.
Ongoing costs
Maintaining a second property is expensive. Maintenance, property taxes, and utilities can add up to significant amounts of cash. Keeping the cottage may be a dream, but your kids may need to take additional steps to afford it.
Managing the ongoing costs of the family cottage may take some planning. Still, fortunately, there are ways to make it work. The right financial solution can ensure the kids keep the cottage for many years of enjoyment.
Mortgage
The person or people who acquire ownership of the cottage can put a mortgage on the property. The amount could be used to pay the capital gains tax, do maintenance and repairs and help cover ongoing costs.
A mortgage can offer set monthly payments at a reasonable interest rate. The payments can be split between the owners of the cottage to make them more affordable.
Line of credit
A line of credit can be secured by the property’s equity. This line of credit is a HELOC or Home Equity Line of Credit. A HELOC allows you to borrow a maximum amount, but you can use it as needed rather than taking a lump sum all at once.
The advantages of a HELOC over a mortgage are that you only pay interest on what you use and can access it again once you pay it down. Payments are usually tied to the prime rate, so they’re not fixed. Your kids who own the property can make arrangements to split the payments.
While both scenarios can provide the necessary funds to maintain the cottage, it’s important to note that the owners must qualify for the mortgage or HELOC. The cottage will serve as collateral, so missed payments could jeopardize it. Also, reaching an agreement on payment responsibilities could lead to conflicts, potentially straining relationships.
It could be in everyone’s best interests not to use debt to maintain the cottage. Here are some options to consider.
A provision in your will
You can designate funds for the cottage’s taxes, upkeep, and maintenance. Often, these funds are put in a trust so they’re used for their intended purpose. Your financial planner and estate lawyer can advise you on the pros and cons of this strategy.
Life insurance
A life insurance policy can provide the funds for your kids to keep the cottage. Two types to consider are term life and a whole life policy.
Term life
A term life policy offers a fixed amount of life insurance for a specific term. You can get a term of five years, for example, or a Term 100, which will be in place until you reach 100 years of age. When you pass away, the money goes to your heirs or the estate and can be used to pay for the ongoing costs of the cottage. If you live beyond the term of your policy, you will no longer be insured.
Whole life insurance
A whole life policy is a permanent policy. It offers a guaranteed death benefit when you pass away, which your beneficiaries can use to pay for the cost of the cottage. A permanent policy will be in place until you pass away, so your heirs will get the death benefit.
Help Your Kids Keep the Cottage
Several strategies are available to help your kids keep the cottage and continue making special memories for themselves and their families. At MDL Financial Group, we’ve been assisting clients to plan for their futures while helping their kids keep the things that they value. Our team of experienced financial advisors can provide expert advice on transferring your assets for future generations. Call us at 613-416-9649 or fill out our online contact form to start planning for your family’s future today.
If you liked this article, check out these three:
https://mdlfinancialgroup.ca/how-to-invest-your-cpp-or-oas-when-you-dont-need-it/
https://mdlfinancialgroup.ca/estate-planning-strategies-to-reduce-estate-taxes/
