Cottage succession planning

How one family used life insurance to protect a cherished asset for future generations

It was this specific question that prompted couple Robert and Marion, both in their late 50s, to have a bigger discussion about the future. After several months of being holed up in their midtown condo during the start of the pandemic, the couple shifted to their spacious, picture-perfect cottage setting once the phased reopening began. The current environment has served as another reminder, they say, of how precious and meaningful this cherished family property is.

On a rainy Saturday afternoon at their lakeside vacation home, Marion was having fun with the Proust Questionnaire (the Canadian version: During a Canadian winter, what is your idea of perfect happiness? Which living Canadian do you most admire? What virtue should replace ‘politeness’ as our national trait? Etc.).

For the record, Robert’s favorite memory at the cottage was proposing to Marion there soon after he bought what was then a “ramshackle shed.” That was 30 years ago when the budding entrepreneur paid his uncle $65,000 for the isolated property in northern Ontario. This question also led the couple to consider which one of their two children would most likely take over the arduous responsibility of maintaining the cottage after they pass away. More to the point, they wondered who would be in the best position financially to do so. While they have made provision in their wills for the children, this doesn’t extend to covering the exorbitant cost of maintaining the cottage for an indefinite period.

After years of renovations and upgrades, as well as a boom in cottage valuations in the area, the property tax on the cottage has skyrocketed to currently $25,000 a year. In addition, their heirs would be responsible for maintenance and repair costs, insurance, utilities, and boating costs.

The key issue for Robert and Marion is how they can ensure their children have sufficient funds to retain the cottage for generations.       

An unexpected solution

One possible solution for the family is the potential use of one of the most cost-effective, tax-efficient financial tools available – life insurance.

Beyond its capacity to provide traditional coverage in the event of a crisis, insurance can be used strategically as a cost-effective, tax-efficient solution. For families wanting to protect the success they’ve spent their entire lives building, insurance can play an integral role in creating a comprehensive wealth-management plan, according to Jeff Fray, Vice President of Insurance Services at Richardson GMP. This could apply to Robert and Marion’s situation regarding the cottage, but it may also be a viable tax-sheltering option for families with a business, other assets or philanthropic commitments.    

In Robert and Marion’s case, their Advisor helped them arrange a Joint Last to Die life insurance policy. This will grow in value along with the cottage value itself, with a projected payout value of what the cottage could be worth in 20-30 years – estimated over $2 million. On the remaining parent’s death, the payout would cover costs, including taxes and debts as well as the premiums that had been paid. Their children, who will inherit the cottage, were more than happy to chip in and are now both paying the policy premiums.

Preparing the next generation

In addition, the family set up a sharing agreement so that the siblings could get used to working together to maintain the vacation property, which they all use on a regular basis. They decided against setting up a trust structure, a decision that means the cottage could be in play if either sibling were to divorce from a partner. To prevent losing the property in this case, the siblings’ agreement specifies that ownership of the property can only be transferred to a linear descendant of their father Robert. The upshot is that a divorcing spouse of the siblings can’t take ownership of the cottage itself, they can only be paid out. Ultimately, the family decided the cottage has greater meaning to them and prefer to keep it in the family indefinitely.

Finding your best option

Mr. Fray, who has over 30 years of insurance expertise, acknowledges the unique potential benefits of insurance as a way to preserve wealth, but stresses it may not be the solution for everyone.     

“If it happens to be the most cost-effective, tax-efficient means of tax-sheltering unneeded cash, or paying tax on a closely held share position, or getting money out of your holding company through the capital dividend account, which can offer significant tax efficiencies – then you should be having a conversation with your Advisor about ways to employ an insurance strategy,” Mr. Fray says.  

Reach out to your Advisor for more information.