Cottage Succession Planning
Many Canadians have been enjoying their cottages this summer, and while they can serve as a great vacation residence or weekend escape, the family cottage can be the subject of debate especially when discussing options for transferring ownership to the next generation. Selling a cottage to a stranger or third party is a straightforward process; but handing down your property to family members requires considerable planning to avoid future complications. There are tax implications certainly, but often more far-reaching and significant are the emotional and personal impacts on your family. Thorough planning and open discussion with the interested parties is extremely important and can help avoid future disputes and misunderstandings that can lead to permanent rifts.
Consider these issues:
- Emotional attachment & desire for ownership
Some vacation homes have been owned for generations and hold cherished memories with a deep significance to the family legacy, while others may be recent purchases or are not used by everyone so emotional ties are not a concern. It is also possible that some family members have no interest in owning a share of the cottage, but you may still wish to include them, potentially via a cash legacy or other means to ensure equal distribution of the estate.
Even if family members wish to take on ownership of the cottage, they may not be able to afford it. Like any property, upkeep costs and rising property taxes can turn this gift into more of a burden than a blessing. This is often the main source of family disputes. Stipulation of responsibilities and expense sharing should be clearly agreed upon, otherwise family members with fewer financial resources may expect those with greater resources to pay more. Additionally, family members who use the property less often may also expect to do less work despite equal ownership interests. Scheduling visits and issues of guest access should also be addressed as part of the overall plan.
- Tax implications
When vacation homes increase in value, owners must take into consideration capital gains tax. Excluding the tax-free rollover to a spouse, significant capital gains may be payable on the transfer of property either during your lifetime or at death. Another aspect to consider are probate fees, which in Ontario are about 1.5% of the property value (e.g. $15,000 on a $1million cottage). Both of these costs unless otherwise provided for (e.g. with a life insurance policy) are payable from the owner's estate. It is important to estimate what this final bill will look like and determine how it will be paid for, especially if some family members are to receive ownership as a bequest and the residue of the estate will be left to others. This is because, in such a situation, the family members who do not receive ownership of the cottage, may have their inheritance unfairly reduced by the tax implications of the property transfer. Another potential outcome if proper planning is not done, is the lack of liquid assets available to pay the terminal tax bill which could result in a forced sale of the cottage to cover expenses.
- Family law - equalization of property
It should be noted that family members’ spouses may become entitled to ownership rights of the property in the event of marriage breakdown. Equalization of assets refers the fact that on marriage breakdown, the spouse whose net family property is the lesser of the two net family properties is entitled to one-half the difference between them. Different rules apply to gifts received before marriage vs. gifts received during marriage, but special planning and the inclusion of clauses and domestic contracts can prevent undesirable outcomes from arising during such a situation.
If you have questions or concerns about passing your cottage or other family property onto the next generation, contact us today.
Posted In: RetirementEstate PlanningTaxes