Millennial Parents’ Guide to Financial Planning For Children

The more I think about what will happen to my family cottage after my parents are gone (read our last post about it), the more overwhelmed I get.

Most of the conversation so far has been around the importance of starting that initial conversation. What happens to the cottage? Who gets it? What’s in the will?

Of course, it gets a lot more complicated than that. For example: who will be paying the taxes when we (my siblings and I) inherit the cottage?

Again, I feel insensitive even raising this subject. But I also know that sometimes the most difficult discussions are the most necessary.

My husband and I already take on a lot of responsibility when it comes to maintaining his parents’ lakeside property. We’re the first of the three couples to help his parents get the cottage ready in the spring, and the first to volunteer to help prepare it for winter come the fall. The cottage is open all year round, but there’s always plenty of work to be done.

And then there’s the expenses that come along with those expenses. I’m just talking about investing our time in maintaining the family cottage right now; we’re not yet involved in helping out with the financial side of things. I don’t even want to think about how much my in-laws just spent to remove all of those giant dead trees last month, let alone the dollars they coughed up to plant new ones in their place.

My in-laws have made jokes about how, since my husband and I put the most work into the cottage, we should be the ones to take over the property when the time comes. But it isn’t that easy, of course.

I know my husband’s parents are extremely concerned with being equal first. They’ve made comments here and there about how we might buy out his brothers’ shares one day, and take on full ownership. But what if we can’t afford to buy them out? What if they don’t agree with the value? What if their spouses don’t want to sell their shares?

Before we even get to those issues, we’ll need to address the taxes that will have to be paid when the cottage changes hands — even if it is being passed on to all of us at the same time.

Calculating the taxes today is one thing, but we want to prepare for the “eventually,” because if we don’t it could mean losing the cottage. Let’s say the cottage is worth $750,000 today. This means our brothers’ shares would be worth $250,000 each. That’s a lot of money. And we haven’t even gotten into capital gains taxes yet.

When the boomers were growing up, it was common for them to inherit a cottage property from their parents. But there’s a catch. This happened before the 90s, before the government began applying profit tax (capital gains) to cottages. Homeowners in our grandparents’ generation routinely recorded the selling price at $1 in efforts to minimize land transfer taxes.

This meant my husband’s parents likely got the property for $1, which was recorded in the town registry as a sale to them from his grandparents estate for $1. This minimized transfer taxes and estate taxes since the true value of the cottage would be recorded in the estate, and therefore would have been taxed before being passed to his parents.

So what does this mean for us?

If the cottage is valued today at $750,000, and the selling price his parents paid for the cottage was $1, then the profit we would have to report on their final tax return when they die would be $749,000. But what freaks us out is the question of what the taxes on $749,000 will be? How will it be shared amongst all the brothers? From what I understand, we could end up paying up to 24% of that in capital gains taxes alone.

Even if we could afford to buy out the brothers’ shares, would it be worth it after what we’d pay in taxes?

At first, the idea of keeping the cottage in the family was a no brainer for us. The sentimental value alone makes it all feel worthwhile. But now, it seems like the only way we could afford the property would be by renting it out for other families to enjoy.

Who knows, maybe turning the cottage into an income property is a better solution for us all. I wonder how that conversation will go over with the family…

I need to know: what’s the best way to manage this? How will capital gains taxes influence our financial decision? Can we afford to keep the cottage in the family name?

Michael Lampel, President and Founder of Insurance for Children, responds to this millenial’s question. YEs, You Can Keep the Family Cottage in the Family