If you own a cottage, there may be family quarrels over who will pay for its upkeep and/or use it once you die. Here are some alternatives:
• plan to have the cottage held in a testamentary trust after you die
• maintain control: set up a living trust so the cottage won't form part of your estate at death
• if they want it, give or sell the cottage to the children while you are alive

Deemed disposition
Whether ownership of a cottage goes directly to beneficiaries or into a trust, a deemed disposition takes place. This means that if the value has increased, capital gains tax may have to be paid.

Your accountant can help you calculate what that may be, based on the current fair market value of the property in excess of what you paid for it. Bear in mind that, generally, half of the net growth in value will be taxed when disposed of, or upon your death. Large capital gains can put you into a much higher tax bracket—higher than your normal bracket—the year the disposition occurs.

If you leave the cottage to one child in the will
Where there is one child, who, to the exclusion of others, will receive your cottage, an inequity may occur. Your estate will pay the applicable capital gains tax on your cottage, thus lowering the remaining assets in your estate for equal distribution among the other children. Therefore, you may want to plan for estate equalization to the other heirs using life insurance proceeds. You could also increase the insurance to pay for the taxation on the cottage. If you are married, the asset is taxable in the estate of the last spouse to die (assuming the cottage passes to the surviving spouse, or spousal trust, on the death of the first spouse). A joint last-to-die life insurance policy may be a less costly method to look after this tax.

Note: Prior to February 28, 2000, the inclusion rate for tax on capital gains was 75%. From February 28, 2000 to October 17, 2000, the inclusion rate was 66 2/3%. Currently, and as of October 18, 2000, the inclusion rate was further reduced to 50%. You may need to treat your capital gains or losses separately, based on these above periods and inclusion rates, relative to the time that you realize your capital gains or losses.