You say that the house deed is only in your name right now. That suggests that it was always in your name or that the cottage was owned jointly with your husband with a right of survivorship. I suspect it was held in conjunction with the right of survivorship, meaning it passed directly to you on your husband's death. That means it passed without his will regardless of his wishes contained in it.
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Are there any major benefits to inheriting a cottage?
Sometimes the property ownership structure trumps a will, and this could be a case of that, Jill. When property passes to a surviving spouse on death, it is automatically transferred to its adjusted cost basis for tax purposes, meaning no capital gains tax is payable at that time. The executor can elect to have some or all of the capital gains taxed on the decedent's final tax return, if it is beneficial to do so, but let's assume this does not happen. This means that all the profit of the money collected is transferred to you and this is important as it relates to the next steps you take with the cottage.
Should you share the inherited cottage?
You may not be legally obligated to include your three stepchildren in the ownership of the cottage, Jill, since the cottage passed without the will due to joint ownership. If in doubt, you should seek legal advice. It sounds like there is at least a moral obligation to place your adopted children in foster care, but it will result in giving away your husband's children—and therefore tax consequences.
Beneficiary of taxes
Because accumulated capital gains have been transferred to you, if you give them three-fourths of the estate, you will have a capital gains tax liability in the year of the transfer. Some people think they can avoid capital gains tax by making a gift of $1 or an amount equal to the cost, but that's not the case in Canada. The transfer of ownership must be at fair market value, which means the valuation you suggested may be relevant, Jill. An appraisal is not mandatory when determining the fair market value of a transfer but may be advisable.
If you think you have enough resources to pay the capital gains tax, you may not have to worry. But capital gains tax can be big if you own a small house for a long time.
Remember that you have options. You can treat the cottage as your primary residence, passing it on to your adopted children, so you don't pay tax. But this will expose your townhouse to capital gains tax upon sale or upon your death.
You need to weigh the pros and cons of paying the tax today versus deferring it to decide, if this is beneficial to use the principal residence exemption for the cottage. You may also be restricted from doing so if you had a principal residence that you sold while owning the cottage and took it as your principal residence, free of capital gains tax. This will go against the years of owning a small house and looking for another main residence.
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