As parents age, they may think about transferring assets and family heirlooms to their children. Often, one such heirloom is the family cottage. Summer vacations at the family cottage are among the most memorable and cherished of times, holding deep sentimental value for parents.
Not surprisingly, many parents want the family cottage to stay in the family for future generations. It’s important to understand the issues surrounding the transition of such an asset to the next generation. This article highlights issues to consider, including income tax implications and options available.
Let’s use an example for the typical issues parents must consider in transitioning the family cottage. Mary, 68, and John, 65, are married with two adult children. Mary and John own a family home and a cottage, which was purchased 22 years ago. Recently retired, they are considering options to keep the cottage in the family, ensuring their legacy lives on.
First, Mary and John need to have a conversation with their children to determine what is in everyone’s best interests. Are the children interested in keeping the cottage? Will they be able to pay the costs to maintain the cottage? What if only one child is interested in the cottage but cannot afford the costs? What if both children want to share the cottage? How can Mary and John ensure the enjoyment and costs are evenly divided between the children? How can conflicts be resolved?
Mary and John must have an open discussion with their children, expressing their desire to keep the cottage in the family as their legacy. At the same time, Mary and John need to listen to their children’s wishes regarding the cottage. The costs and responsibilities associated with cottage ownership must be discussed, especially if the parents will not be financially contributing to cottage upkeep.
Assuming Mary, John and their children all agree the cottage should remain in the family, several options are available to transition the cottage to the children, each with its own tax implications and other considerations.