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Endow your Cottage!
A cottage endowment is a sum of money that is invested with the intention of producing income that will pay some or all the expenses of cottage ownership. The article contains a link to an Excel spreadsheet that will help you estimate how mouch money you must set aside for the cottage to be self-funded.
Let's assume that your cottage costs $15,000 per year to own ($6,000/year property taxes, $1,000 insurance, $2,500 average annual repair bill, $2,500 utilities, and a reserve of $3,000 to pay for future septic field repair, roof repair, and painting). If you pass your cottage on to your three children, unless they rent the cottage out each must pay $5,000 per year to defray this cost. $5,000 is not a lot of money if you have it, but if you do not, finding this sum can create anxiety.
Some families address this problem by setting aside a sum of money (the “endowment”) the income from which is dedicated to paying cottage expenses. Continuing the example above, if you believe the endowment will earn 5%, then to fully "endow" the cottage you would have to put $300,000 aside ($15,000 divided by .05). Although this example ignores income tax, increases in property tax, etc., it does illustrate how a dedicated fund helps a family afford a cottage.
The money used to establish an endowment ordinarily comes from the parents who are setting up a cottage succession plan. The fund can be set aside through in the parents’ estate plans or may be created through the purchase of life insurance. Second-to-die life insurance is an excellent product to use to fund the cottage endowment because the premiums are relatively affordable.
Siblings and cousins who own a cottage may agree to set aside money for a cottage endowment through self-assessment.
Once funded, the endowment may be managed by the family, a bank trust company, or a financial or investment manager.
An endowment is a wonderful gift to the future.
Here is a link to a spreadsheet that will help you compute how much money it will take to fund your cottage's endowment. You must have Microsoft Excel installed on your computer to use the spreadsheet. Click here to download the spreadsheet. Please email me if you would prefer an unprotected version of this spreadsheet.
Stuart J. Hollander (2006) |
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