How advisors untangle the family cottage conundrum

Call them cottages, cabins, or camps the summer vacation properties that so many Canadian families own and love is as much a source of consternation for financial planners as it is a source of joy for the families who own them. These properties are often tied to foundational memories, long-held expectations of family time spent together, and a whole lot of emotional baggage. They also offer a test case in family wealth planning, as the expectations around the property can vary widely between generations. A host of scenarios and permutations can arise around who gets what, often coming with fraught feelings.

The financial realities of these properties have to be addressed as well. For the generations that own them issues of maintenance cost, rising property taxes, and their potential use as a primary residence after retirement have to be understood. For the children of cottage owners expecting to inherit the property, there’s the management of a potentially significant capital gains bill that has to be dealt with. For advisors with clients who own a cottage, the intersection between emotional management and estate planning inherent in cottages can be a real challenge.

“The cottage isn't a real estate conversation, it's a family conversation that involves real estate,” says Laurel Marie Hickey, Senior Wealth Advisor and Senior Portfolio Manager at iii Global Wealth of Wellington-Altus Private Wealth Inc. in Calgary. “People focus on the memories, and their memories shape their vision of the place. But you have to deal with people who might not have the same vision. So we always talk about it in our meetings, because those conversations always end differently than they started.”

Opening up the cottage conversation

For Hickey, the work around these properties begins with conversations about insurance, estate plans, and wills. Through those conversations the cottage or cabin will come up, giving her a chance to ask if the children know what to expect when they inherit the property. She notes the example of parents who have decided to give one child the property without consulting that child, or who expect all the children to take it on when only one is interested. Hickey says she will often use this to start a deeper advanced financial planning conversation that takes the cottage property into account.

Those conversations also allow advisors to unpack some of the financial assumptions around a cottage. Some clients may elect to move to their cottage after retirement, selling their primary residence. While this may save somewhat on capital gains, any gains that the property enjoyed while it was a cottage will still have to be reconciled with. Hickey also highlights the significant maintenance costs and higher costs of renovating a remote property. Those costs are driving a sweeping change in the cottage market, according to David Little, Senior Wealth Advisor at Blue Oceans Private Wealth of iA Private Wealth in Burlington. 

“I’ve got three or four clients right now that are looking to sell. They’re trying to sell their cottage. The problem is that they can’t sell them because there’s so many on the market,” Little says.

A reckoning and a reset for vacation properties

Little sees a host of factors influencing the increasingly popular decision to sell the cottage. The first issue he highlights is property taxes, which tend to be higher in rural and remote areas but have risen significantly in municipalities known for their cottages. Then comes the cost and work of maintaining a property, the eventual estate issues that it presents, or the risk that comes with aging in a property farther away from a hospital or appropriate healthcare resources. Little also sees a cultural and a generational shift away from cottage properties, leaving a cohort of inheritors and potential new buyers who have no interest in cottage living. In the case of potential heirs, Little notes that they’re often very far away now. 

“It’s kind of funny that the number of clients I have, the children don’t live anywhere near them anymore. You know, we have clients who have children living in California, they’re living in British Columbia, they’re living in Nova Scotia. They’re living down in the United States. They don’t live in this area. So they don’t really see the cottage as a place to keep as the family homestead, like you would have seen in the 50s and 60s and 70s,” Little says.

When working with retired clients who own a cottage, Little says he often advises them to sell when they come to him talking about spending less time there. He frames the decision as one of opportunity cost, asking whether those clients would rather spend time at the cottage or travelling, while they have the time, money, and energy to do so. Often that framing is enough for clients to decide that it’s time for the cottage to go.

Managing emotions, expectations

In those situations where the family keeps the cottage and an estate plan needs to be drawn up, both Little and Hickey acknowledge just how emotional these questions can be. Little believes that those emotional decisions are the hardest part of an advisor’s job. He believes that rooting conversations in the finite nature of time and money can help to remove emotion and make the decision more rational.

Hickey, for her part, favours openness and fulsome discussion to help every stakeholder in the family reckon with what to expect from the cottage. She believes the greatest mistake advisors can make in these situations is leaving assumptions unaddressed. When the conversations aren’t held, or are left too late, they leave room for strife that can work away at families and gradually weaken them.

“There's the financial impact, but there's the human impact. You're going to have a lot ups and downs with that, and it might just change the taste that you have for this thing that you love so much, and the memories that you had. Now you have a new memory when you're looking at the property or whatever it might be at the cabin. And it's not the enjoyment, it's the strife that it took you to get there,” Hickey says. “having the conversations early on is the fix.”