02/26/2013 07:46 EST | Updated 04/27/2013 05:12 EDT

Don't Let the Cottage Tear the Family Apart

In this undated family photo, Ted Sahn sits on the porch with his daughter, Robin Yaeger, at his home in the Camp Osborne section of Brick, N.J. Both Yaeger and her sister, Geri Girard, would pack their families up to spend entire summers at the home before it burned to the ground during Superstorm Sandy. (AP Photo/Sahn Family Photo)

The cottage can be a place full of warmth and the source of lifetimes of memories for many families. They remind individuals of summer days spent with beloved family members and the happiest moments of childhood. They can be instrumental in bringing families together.

Tragically, all too often, they can also tear families apart. The question of what to do with the family cottage on the death of the owner can be one of the more contentious issues in estate planning and can lead to emotionally charged and divisive litigation.

One reason that the cottage often becomes the centre of an estate dispute is that it affects the estate and its beneficiaries in financial ways as well as emotional ones. The cottage is emotionally charged in a way that most estate assets are not. Personal feelings and family traditions are deeply ingrained and are strongly associated with it. In many cases, the cottage has been in the family for many generations. But at the same time, the cottage is an estate asset bearing a dollar value, maintenance costs and tax obligations. Difficulty in reconciling these two divergent views of the cottage can spark animosity within even the closest of families.


Canadian Cottage Country

The resolution to these problems need not be as simple as giving the cottage outright to one beneficiary. In many cases, the result is that the cottage is sold on the open market and the proceeds are distributed according to the estate plan. There are, however, a number of options available to families who are willing to be more creative. One possibility is to transfer the cottage during the owner's lifetime to the next generation who may make use of it. In this way, families can start to become familiar with the responsibilities and burdens of maintaining the cottage, and the challenges involved in allocating use of it amongst themselves. The use of a trust, either inter vivos or testamentary, can be employed to transfer an interest in the cottage while maintaining some control over how it is used by the family. A well drafted co-ownership agreement can help individuals work out amongst themselves how the benefits and obligations associated with the cottage can be divided between siblings and their parents.

The options must be carefully considered against the backdrop of family dynamics while factoring in the financial consequences of the cottage. There may be significant tax obligations associated with the transfer of a cottage in the form of capital gains. This may necessitate selling the asset to pay the taxes. One way to mitigate this is to purchase life insurance products which can fund the estate's tax obligations created by the gain in the value of the cottage.

As with most contentious issues in estates, the problem can best be dealt with by good communication while the owner of the cottage is still alive. Taking the time to meet as a family can be an invaluable exercise. Beneficiaries can be asked about their feelings regarding the cottage. It may turn out that some of them are not as interested in a share of the cottage as their brothers and sisters. Some may lack the resources to maintain the cottage and will find it to be a burden rather than a benefit.

Any approach to dealing with an emotionally charged asset such as the family cottage may lead to disagreements, and it may be impossible to prevent friction during transmission between generations. By taking appropriate steps, communicating with one another, finding creative solutions, and by working together as a family, the cottage can continue to be the source of cherished memories for future generations.

Ian Hull and Suzana Popovic-Montag are partners at Hull & Hull LLP, an innovative law firm that practices exclusively in estate, trust and capacity litigation. To watch more Hull & Hull TV episodes, please visit our Hull & Hull TV page.