Another memorable weekend at the family cottage has just ended. Thoughts of children and grandchildren soaking up the sun, eating ice cream and fishing off the dock are fresh in your minds. These are memories you want to make sure your family continues to have and to create long after you are gone.
Keeping the cottage in the family for future generations requires a plan that is well thought out and includes a realistic analysis of everyone’s ability to share the cottage while maintaining harmonious relations. There’s much to consider – transfer of ownership, tax implications, maintenance and upkeep costs and overall control of the cottage.
Perhaps, the best way to start a cottage succession plan is to have a family meeting – a candid discussion where children are able to discuss their hopes and wishes and to voice concerns they foresee with sharing the cottage. As current owners, you will be required to realistically tackle issues associated with sibling rivalry, marital status of the children and their individual financial circumstances. The last thing you want is for the cottage to be sold because of a failure to plan ahead.
Capital Gains Tax: The transfer of the cottage on death or during your lifetime qualifies as a disposition for tax purposes. So, if you bought the cottage, or inherited it years ago for a few thousand dollars and it’s now worth a few hundred thousand dollars, this increase in value may result in a large taxable gain. This gain is triggered when the property is passed along to anyone other than a spouse. (The principal residence exemption may be available to minimize the impact of capital gains tax.)
Probate Tax (fees): Probate fees are payable on the death of an individual, calculated on the value of the estate that is governed by the individual’s Will. Regardless of whether the cottage is going to a spouse or children, if it is in the sole name of the deceased individual, probate fees are payable. Each province has its own rate. So, if you live in Manitoba and have a cottage located in Ontario, the probate fees on the fair market value of the cottage are based on the Ontario rate.
Succession planning options
Keeping in mind the tax implications, consider which of the following options is right for you and your family situation:
1. Gifting: One can gift the cottage to children, either as joint tenants or tenants in common. This can result in loss of control of the cottage. Further, if there are marital/creditor concerns for the child(ren) who is to receive the cottage, you may not choose to gift.
2. Sale to children: This option can provide financial support by providing access to funds during the retirement years.
3. Transfer to an Inter-Vivos (living) Trust: Transfer the cottage to a trust for the benefit of beneficiaries. You may set rules around use of the cottage, transfer of the cottage on the death of a beneficiary and upkeep and maintenance.
Transfer on Death
1. Bequests through a Will: A clause in a Will indicates to whom the cottage is to be transferred. If there is more than one interested beneficiary, the Will can give them the right to purchase the cottage in order of priority (right of first refusal), or give an option to purchase to just one beneficiary. The clause can also provide for a beneficiary to take the cottage as part of their distributive share of the estate.
2. Establish a: Testamentary Trust Similar to the transfer to an inter-vivos trust, but the testamentary trust is established at your death by way of your Will. Creating a maintenance fund is important to this method of planning.
Funding the tax bill
Sadly, you cannot escape the tax bill on your estate. If there is tax to pay, the use of life insurance may be a great way to minimize the impact the tax bill will have on the estate. The cost of insurance may not be high when measured against the loss the family will feel by not having a cottage to enjoy for future generations. Life insurance can provide liquidity to assist beneficiaries with upkeep and maintenance of the cottage, or even provide for an equalization payment to a child who is not going to receive an interest in the cottage. Your investment advisor can assist you with quotes on the cost of life insurance.
We view cottage succession planning as a team effort, so in conjunction with speaking to us further, we would be pleased to work with you and your investment advisor and accountant to find the right solution for you and your family.
For further information, click here to contact an Estate Planning lawyer.