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Cottage season is here and those of us that count ourselves among the lucky number of families who enjoy summer days out of the city will be on our way to our favourite “side”: lakeside, oceanside, mountainside or countryside. At Northwood, our approach to managing family wealth leads us to many conversations about vacation home assets, most often about how to maintain them across generations. Although vacation properties normally form a relatively small percentage of wealthy family net worth, they often dominate estate planning discussions due to the emotional aspects associated with a family property.

We often work with other advisors in developing solutions for vacation properties, and each can fill an important role in planning for a cottage transition. For example, insurance advisors will typically recommend taking out joint-last-to-die policies to cover off capital gains taxes and provide liquidity for an estate; accountants will focus on calculating adjusted cost bases to ensure taxes are minimized; and lawyers can assist in drafting detailed plans for setting up a trust or other structure to maintain the asset for future generations.

Building a team of advisors to help develop the transition strategy is a key component of any cottage transition plan. Interestingly, although each type of advisor brings a different solution to cottage transitions, one aspect remains common within their advice – “Talk to your kids”.

The catastrophe stories of family cottage transitions resulting in family disarray are all too common. We recently listened to a presentation by a litigation lawyer who spends significant time dealing with vacation properties, and his one piece of advice to parents was very straightforward — “sell the cottage before you die”, and avoid future problems. Although on paper this is the easiest solution, most families will find themselves wanting to keep the cottage and make some form of transition to the next generation. Keeping the plan a mystery until wills are read gives a much higher probability of future challenges. Starting the conversation as soon as your children are ready is the best way to prevent your family from becoming one of the disaster stories.

So where does one start in the discussion? There are many ways to begin, and each family is unique. However, trying to establish consistent and open communication amongst all family members is the key. We’ve found that cottage properties are a great conversation item for family meetings, and the conversation doesn’t have to start with discussing long term/estate plans for the cottage. In addition, family members are often not a stage in their lives to comment on their long term wishes (or maybe even understand them). A more effective way to break the ice is to start by working through some of the typical cottage owner decisions as a family. Often these are also items that are also becoming a concern to parents (i.e. maintenance, usage). Depending on the age and stage of your family members, we’ve found that focusing a portion of a family meeting on a few of the topics below is a great way to start the conversation:

Maintenance

  • What will be done by the family, what will be contracted?
  • Who will manage the contractors?
  • Who is responsible for tasks that will be completed by the family?
  • When should tasks be completed?

Usage

  • Should specific time be allocated to each family member?
  • If yes, how should it be divided? Shared use? Exclusive use?
  • What is the family policy on guests?
  • Should the family make an effort to have an annual weekend with all family members?

Investment

  • What are the biggest priorities?
  • When should different capital improvements be completed (i.e. new dock, repair the roof, purchase a new boat)?

Starting to explore a few of the topics above is also a great way for parents to see how the family will work together, and what the ultimate transition plan should be.

If a cottage property will ultimately be transitioned to the next generation, taking the additional step of asking family members to make a financial contribution to the ongoing maintenance, and/or capital investment at the cottage while parents are alive may be a good approach to help the next generation learn about the cost and process of managing what are often very complex properties. Although parents are typically able to afford the ongoing requirements, getting financial commitment from the next generation is a point of clarity for parents regarding their children’s desire to commit to the cottage. Contributions may not be equal depending on circumstances, however, some form of individual financial commitment is a good step to take if it is expected that the cottage will be shared or owned by an individual family member in the future. If a family wishes to adopt this approach, they must then focus on asking questions such as:

  • Who will be responsible for managing the overall cottage budget/financial plan (routine maintenance, capital spending)?
  • How much will each family member contribute?
  • Are all contributions to be equal?
  • What significant items can the budget afford?
  • Should a reserve/emergency fund be established?
  • Should a cottage bank account be created?
  • Who is responsible for paying for specific items?
  • How will major financial decisions be made?

Starting a cottage discussion about smaller manageable tasks is a great step for parents and will often evolve into the more challenging conversations about estates and the ultimate cottage transition. Ideally, a blueprint for discussing issues through working on smaller items is developed through these initial conversations. In some cases this can lead to more formal documentation through a cottage agreement which outlines the family decisions on items such as usage, finances, and the transition to future generations.

Over the summer, give some thought to how you might start the cottage discussion within your family. Enjoy your time in the country, by the lake, mountain, or ocean, and consider how a well developed plan of talking with your kids can help ensure that generations of your family to come can do the same.

Eric Weir

Eric Weir

Eric is responsible for client service and client investment management at Northwood Family Office, which looks after the investments and integrated financial affairs of wealthy families with $10 million or more. Eric has an Honours Business Administration (HBA) degree from the Richard Ivey School of Business at the University of Western Ontario. Eric is a Certified Financial Planner (CFP) and holds the Chartered Financial Analyst (CFA) designation. He is a member of the Toronto CFA Society.

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