Your plan for the family vacation property

Designing your plan for future ownership of the family cottage/cabin can be challenging. Here are some things to consider.

Get Input From Your Family

Parents may agonize over a complex plan only to learn later that it isn't necessary because children have no interest in ownership once the parents have passed away. If your children are not sure, or their lives are still unsettled, your plan needs to be flexible.

Look at the Numbers

An up-to-date net worth statement is essential to good estate planning. You need to consider the value of the property compared to the value of your estate as a whole. Recreational properties often escalate in value significantly so there may not be enough left over to fund an equal inheritance to children who do not want the cottage, or there may be insufficient additional distributions to those who do.

Remember the Taxes

The principal residence exemption is available for recreational use properties. However, for years of ownership after 1981, a married couple can only claim the exemption for one property for any particular year of ownership. Usually the exemption is used on the family home, and the taxes on the cottage or cabin will be payable by your estate, not the beneficiary.

Provide for Liquidity if Necessary

If your estate has a shortfall because of the taxes or because the property is the major asset of your estate, consider ways to provide additional funds in your estate. Instead of a specific gift of the cottage, you can give your children the option to purchase, and they can use all or a portion of their inheritance to fund it. The proceeds will be available to pay the taxes and distribute to other beneficiaries. Life insurance may also be a funding solution. The children could purchase the insurance on their parents' lives to provide the funds to pay the taxes owing by the estate, or to fund the purchase price so that funds will be available for other beneficiaries.

Set Up a Trust to Manage Multiple Users

If family members will share the cottage or cabin, or multiple buildings or parcels of land need to be kept together, a trust can provide for easier management and fewer arguments than joint ownership. Trustees will be appointed, usually one to represent each family group. They will make the decisions about time allocations and repairs, and will pay insurance, taxes and utilities. The trustees decisions must be made in accordance with the guidelines you create. A maintenance fund should be created to set aside separate funds to provide for major expenditures. Property in the trust will be deemed sold at fair market value every 21 years, so you may want to provide for a plan to wind up the trust before the 21st anniversary of your death. Children can be given the option to enter into their own arrangements for joint ownership or be bought out. An option to sell the cottage and distribute the proceeds should also be included.

Consider a "Cooling Off" Trust

A long term trust may not be practical if children will not co-operate, or you know in advance they will not get along. A short term trust, one for 5 years or less can be used as an alternative to give children time to recover from their grief, and examine their own financial situations in the light of their inheritance. Over this period the children can sort out whether they are interested in continuing to use or own the cottage. Postponing the decision can be a good way to avoid conflict that may arise in the year after death when emotions may be running high, and children are not sure of what they want or whether they can afford it.

Decide When to Transfer the Property

If you want to transfer the cottage to children during your lifetime, the transfer will trigger any gain on the property and tax may be payable. This also applies to a transfer to a trust, except for an alter ego or joint partner trust: available only if you are 65 or older. You may lose control over the property, and if you want to continue using it you can make arrangements for a life lease, or reserve a life interest. Be careful: a transfer to children could expose the property to children's creditors or family law claims, and unexpected events may make you regret your decision. Consider for example what if your child dies before you or decides to sell the property?

Get Professional Advice

While every family situation is unique, estate planning professionals have experience in helping you look at all the options, and selecting a solution that produces the right result for you. The expense of good advice is well worth it when you consider the potential savings from tax planning, and the benefit of a well thought out plan that you and other family members see as fair.

Our team would be happy to help you start the financial planning process; please contact Mike McPhillips at 416-359-4266 or via e-mail mcphillipsdurkin@nbpcd.com.