The family cottage: managing inheritance of an emotionally tied property

Transcript

Intro Speaker:

Hello, and welcome to Matters Beyond Wealth with your host, Leanne Kaufman, president and CEO of RBC Royal Trust. For most of us, talking about subjects like aging, late life, and estate planning isn’t easy. That’s why we’re going to help get the conversation started on this podcast while benefiting from the insights and expertise of some of the country’s top experts. We want to bring you information today that will help to protect you and your family in the future. Now, here’s your host, Leanne.

Leanne Kaufman:

Whether you call it a cottage, a camp, a cabin, or a chalet, secondary recreational properties are very popular in Canada, and they’re places where wonderful family memories are made. But when it comes to estates and estate planning, cottages are also one of the topics most fraught with emotion, family disharmony, and in some cases total family breakdown.

Hello, I’m Leanne Kaufman and welcome to RBC Wealth Management Canada’s Matters Beyond Wealth. My guest today is Justin de Vries, the principal of de VRIES LITIGATION LLP, a firm that has been named as one of the top 10 Wills, trusts and estates law firms in Canada since 2019 by Canadian Lawyer Magazine. Justin has chaired and lectured at various continuing legal education programs regarding estate, trust and capacity matters. He has published articles in the Estates Trust and Pension Journal, The Litigator and the Toronto Law Journal, just to name a few, and he is the founder of the popular blog site allaboutestates.ca. Justin is recognized as a leader in the estates and trust bar and has consistently been named one of the best lawyers in Canada for trust and estates.

Justin, thanks for being here with me today to discuss cottages and some of the emotional issues that can arise with property and why this matters beyond wealth.

Justin de Vries:

Thank you for having me, and I can say I’ve litigated about cottages and chalets on all sides for any number of years.

Leanne Kaufman:

Well, okay, so you’re very well positioned then to have this conversation with us today. So let’s start with what is it about cottages or family farms or chalets or whatever type of special real estate we’re talking about here that makes it so likely to cause family drama?

Justin de Vries:

Well, I mean I think you summarize it, and I don’t think it’s really any secret, it’s the emotional attachment that comes with it, whether it’s because it was your parents’ place that they bought and built and you grew up and you learn to skip rocks and jump off rafts into water or whether it’s a place of refuge that you go to escape. I call it a treasure box of memories, good and bad, mostly good, but people have a strong attachment. To a certain extent too, a second recreational property has become prestigious, maybe it always was, but I think in a big city to have a secondary property to escape to gives you a certain status, but also with the pandemic, it created a lot more cache as well that you could escape from that. So, all of that comes together, but it’s mainly the emotional attachment and you’re now dealing with adults and the parents aren’t really there necessarily to referee after they’ve passed away, so that’s a problem.

Leanne Kaufman:

And the kids just never learn to share.

Justin de Vries:

Yeah, and people change, different personalities and you do learn to share, but your sharing definition is different than mine and it’s hard. It’s simply hard for extended families to share a valuable asset, be it a cottage or really anything else to, it’s fraught—a lot of problems.

Leanne Kaufman:

Yeah, I’m being a bit glib in saying that and there are practical considerations such as who can afford what is I think one of the more common ones. But you mentioned you’ve litigated all sides of these kinds of conversations. You’ve certainly seen your share of family fights after a key family member has passed. So give us an idea, what are some of the more common types of disputes or areas that create the strife when it comes to cottages?

Justin de Vries:

Sharing the cottage. How to share it is a big one, obviously. How expenses are paid. Does the estates set up a trust for that? Does everybody contribute equally? Of course, the division of labor is never equal. You don’t do as much as I do, you don’t clean up the ashes from the fire pit. You leave your cigarette butts on the beach. So, there’s disputes just about using it and access. There’s dispute of, as I said about expenses, how to cover the expenses, whether an expense is legitimate. Then there’s also disputes about valuing the cottage if someone is to be bought out or if that’s an option. How do you value it fairly? Some people say it has to be on the open market in order to get the best price. Other people will say, certainly we can find a way to come up with fair market value through the use of assessments.

Sometimes it’s the removal of trustees, someone sits too long in a cottage, doesn’t do anything with it, doesn’t move forward, doesn’t want to sell it, is using it to the exclusion of others, so that causes issues as well. What’s interesting is that the courts have said—there’s actually even a case I just looked at recently where they said that you get no special status because you have an emotional attachment to a cottage. It doesn’t give, you would think that you would throw yourself on the mercy of the court and say, “Well, this is a place I love and I’m going to look after it and this is what my parents wanted.” The court won’t give you any particular status from that.

Along those lines, the best way to deal with the cottage is, in my view, is for the parents certainly to talk to their children before, well before they plan their estate or deal with the cottage. Talk, talk, talk. Who wants it? Why do you want it? Can you afford it? How do you share it? Do you share it? Why should you share it? All of that is all part of the conversation to try to avoid some of those issues, but to be honest with you, it’s almost impossible to avoid them all. There’s going to be trouble somewhere down the road.

Leanne Kaufman:

Yeah, and as you pointed out, sometimes the truth doesn’t come out until mom or dad isn’t there to referee or be the voice of reason or the heavy hand, and then that’s when the problems start to arise, I think.

I’m sure many of the legal actions, the lawsuits that you get involved in end up being settled out of court. What are some of the ways that families end up coming to agreement outside of a judge having to impose an order when these disputes arise?

Justin de Vries:

Well, as you probably know, mediation is a go-to position for most estate matters, but of course that means compromise. So people step outside the court system, they hire a third party facilitator who’s neutral, often a retired judge, a senior member of the estate bar, and they meet on a without prejudice basis, which means anything you say or do in the mediation can’t be used against you, and they have a frank discussion to see if they can resolve their disputes. It’s about compromise though, and that’s the other issue. You have to think about it. What do you need as opposed to what you want? And you can be realistic about, do you really want the cottage? Can you really afford the cottage? So often the result there is the cottage will be sold or someone buys someone else out. Maybe it’s over a period of time. I mean, mediation allows you to be creative because you’re not limited by rules of evidence or by a judge making a decision. Maybe use it for five years and then sell it, or maybe you get paid out over time with the use of the cottage once a summer, so there’s a variety of things. Then the other thing I suppose is private arbitration, which is like a private court, so you’re going to court, but it’s quicker, I suppose, and it’s also usually less expensive. So those are options that people can try to use to move forward. Before you even get to litigation, if I may, I mean, there’s a series of estate planning steps that you can take to try and address what will be a difficult situation and there, the lawyer you hire is worth every cent. I mean, you don’t want to be penny wise and pound foolish.

Leanne Kaufman:

No, of course not.

Justin de Vries:

You want to get someone who knows what they’re doing.

Leanne Kaufman:

And I think that’s a great segue to talk about what are some of those ways that you think families can potentially get in front of these issues even I mean, forget about before it becomes litigious, while everyone is still alive and able to talk about it. Have you seen some strategies that work better than others?

Justin de Vries:

I guess a lot depends on the family. The short answer is there’s no magic bullet or there’s no perfect solution. I think the main thing, as I said before, is the parents or the patriarch or the matriarch should really get people together and say, let’s talk about the cottage. What do people want? What can they afford? Can you share it? What does that look like? Then from there you can talk about provisions where it is some sort of joint ownership. Maybe the estate pays for repairs for the first five years, so there’s a fund set aside for that. Maybe eventually the cottage will be sold. Maybe there’s a three-year trial period to see whether or not people get along. If they don’t get along and someone wants to be bought out, the other children can buy out that person, failing which it’s sold on the open market.

If the cottage is going to be sold, maybe you first do a private process where someone can put in a sealed bid and the highest seal bidder would get the cottage, or one side gets an appraisal and then the other side gets an appraisal and you divide the difference or get a third one. There’s ways of dealing with it, but those are going to be fraught as well, or cause resentment. “You have more money than I do, so you could put in a higher bid” or “You went to the worst appraiser in the county and got a lousy appraisal, and I don’t like that.” I mean, I’ve seen all of that. Some people say cynically, the best result is sell it, just sell it.

Leanne Kaufman:

That’s the advice I give too, but I’m sure that’s not the popular answer. In fact, I know it’s not amongst the people I talk to.

What about if there’s a co-ownership agreement, sort of like a shareholder type agreement. Is there any better chance of success if these things have been articulated or does it still create areas to be fraught for disharmony when it actually comes down to it?

Justin de Vries:

Well, it’s always better to have things in writing, and it’s always better to have it more detailed rather than not. But no agreement can anticipate every adverse situation or every dispute that may arise. So, there should be a dispute resolution mechanism built in. The other thing, sometimes with those agreements, they extend to the next generation. So, while the current children get along, maybe their grandchildren don’t get along so well. People move out of the jurisdiction. So sure, it’s better to have things in writing. It’s better to try to think things through, but it too will cause resentment over time.

Leanne Kaufman:

Not a panacea.

Justin de Vries:

Not a panacea, but better than nothing. Better than nothing, better than nothing, I think.

Leanne Kaufman:

And some of our listeners might not be as familiar with the concept of trusts and the way that a trust might be used, so maybe we should talk about that for a minute. How have you seen trusts get used in order to try to even out the equation amongst co-owners in the next generation?

Justin de Vries:

Well, sometimes you see an alter ego trust or a joint partner trust used so that the asset is transferred into a trust and they have the right to use it during their lifetime. But that sometimes can be fraught because if a child starts to use it, obviously that may taint the trust because only the settler of the trust is to get the benefit of that, so there’s issues there. Someone becomes incapacitated, so they stop using it, so others do, put it in a trust. There’s issues about the 21 deemed disposition rule, and yes, you have a series of beneficiaries, but that’s still… Who are the trustees? Do you trust the trustees? Do they make the right decisions? Is there disputes there? I’ve also seen a non-share corporation used where people are members and whether that non-share capital corporation becomes a not-for-profit as well is something that you can apply for under the tax code, but that too is not perfect. They’re all, I think, to your point, Leanne, good options to discuss with family and an estate planner.

One of the things I would suggest is have the family have a discussion and then bring a lawyer in and have the family discuss the various scenarios and ask questions of the lawyer. Then the lawyer as a neutral third party can diffuse some of that or answer some of those questions. Of course, the parents are around there as well, so everybody’s also on their best behavior. You can have an agreement amongst the family. Maybe you get an agreement and there’s a contract and people sign off on the contract. Is a contract enforceable? Do you really want to go to court? No. But you’ve probably seen families, they have a family mandate or a constitution where they say, this is what we’re going to do with our wealth. People buy into the concept.

Leanne Kaufman:

There’s moral suasion at least.

Justin de Vries:

Yeah, and back to talking and back to having a good lawyer to raise all these options because every option has a downside and nothing’s perfect.

Leanne Kaufman:

And I guess back to your point about no two situations are going to be the same. What is the likely cause of the strife in your particular family or potential cause of strife, and how do you best protect against that? So, if it’s not all of the co-owners have the same financial wherewithal, then maybe a trust or something that puts aside a pot of money for the collective use of the cottage and its owners is something that might make sense. If it’s more about, how do we share time? A trust isn’t going to help with something like that. So I think your advice is really sound: talk about the things that matter, figure out where those problem areas might be, and then work with a professional who’s got experience with it that really can help you bring that to life.

Justin de Vries:

Yeah, and I don’t think you really want a third-party trustee either, because if you introduce a stranger into a family situation that’s going to cause problems. Even with the trust that has money to pay for expenses, there’s a divide: “Well, I don’t think we need a new fridge, the old fridge is perfectly fine.” And if the trustee decides you need a new fridge, maybe there’s a resentment towards that. Who knows? Because we’re not spending it. “I think we need a new ski boat as opposed to fridge, that’s where we should put our money.” So to my point be—and I sound like a cynic, I’ve called cottage planning the poison ivy of estate planning because it’s just something you don’t want to get—but there are options and you can discuss things to try to move forward, but it’s difficult, very difficult.

Leanne Kaufman:

So, what’s one key message you’d like to leave our listeners with when it comes to cottages or other emotionally charged property and estates?

Justin de Vries:

Well, as I’ve said before, is convene a family meeting and talk to your children and maybe their children or your grandchildren. You can first start off privately and then have a family meeting. You can bring an outside facilitator for that as well, depending on the worth of the cottage. The reality is a lot of families can’t afford to keep a Muskoka cottage, for example, in the family. It’s just too expensive now, especially with taxes and other upkeep. The other thing is to hire a good estate lawyer, and that’s not a plug for lawyers. Sometimes lawyers are [a] necessary evil and you get what you pay for. Try to find someone who can provide real options for the family—emphasis on family—to consider. And don’t leave it to your children to figure it out. Big mistake. Your children will figure out they don’t like each other is what’s going to happen. So, you take control of the process, be fair, open-minded, and help facilitate a workable solution.

Leanne Kaufman:

Very sound advice and thanks, Justin for helping us get through the poison ivy, the thorny issues, maybe a few more nature related metaphors I can throw in there. But thanks very much for joining us today to talk about how to plan for a smooth transition of a family cottage to the next generation and why this matters beyond wealth.

Justin de Vries:

Happy to be here.

Leanne Kaufman:

You can find out more about Justin on LinkedIn or devrieslitigation.com.

If you enjoyed this episode and you’d like to help support the podcast, please share it with others, post about it on social media, or leave a rating and a review. Until next time, I’m Leanne Kaufman. Thank you for joining us.

Outro speaker:

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