Passing on Family Assets

Passing on items, money, and acquisitions to your family is somewhat difficult and a long process. Some of these assets are so precious that relying on common sense and your family’s judgment won’t be such a good idea. Especially when it comes to precious belongings like a summer or winter home or cottage. For most families, a cottage is a very precious asset that they want to keep for their siblings and for their children to come. That is why very careful and thorough planning needs to be made to secure a stable and successful succession process.

In this article, we are going to walk you through some of the problems that might be faced during this process, and some solutions for them. Although it is highly advised that you take legal advice so that everything goes well according to your family’s circumstances.

Consider the Circumstances

First of all, you need to consider all the options and circumstances regarding the position of the cottage you are willing to pass on. You need to also know the circumstances regarding the generation that’s going to acquire the cottage in the future. For example:

  • One child wants the cottage but can’t afford to buy the rest of it from the other children.
  • The person receiving the cottage can’t afford to live in it and keep up with the bills.
  • It’s difficult to use or live in the cottage because of the distance.
  • What would happen to the cottage if the person acquiring it gets bankrupt or dies?
  • Disagreement builds among the children receiving the cottage regarding repairs, renovations, or housekeeping standards.
  • One of them doesn’t play by the rules.
  • One of them is a U.S. person.

These conditions and situations need to be taken into consideration if you want a clear and well-planned succession plan. That is why an early conversation about this plan with your successors is a good idea, to know if they really need this asset or not. After establishing all of the costs and responsibilities they need to handle, it would be easy for them to make their decision. If they think they are ready for the acquisition of the cottage, then strategies to address the financial and legal barriers need to be made.

Managing Capital Gain Tax

When a family asset, or a family cottage as we explained, is passed on to the children, it’s recognized as capital gain tax. Whether the cottage has been given during the parent’s lifetime or death or even sold to the children at a low discount price. No matter what the disposition was it can result in a large tax bill or even double taxation. Thus, the government will view this process as a sold asset at a fair market value. This will have the parents paying capital gain taxes on the disposition of the cottage.

However, there are some ways to minimize the capital gain tax. One of these methods is to transfer an undivided interest in the cottage over several years to the children. In this case, the taxes are spread out for each year and are paid in small portions. This might help in lowering the tax rate instead of just paying the entire amount for one year. Another efficient method that can help with your capital gain tax is designating the cottage. Basically, what cottage owners do is distinguish the cottage as the primary residence for them, as this allows for a principal residence exemption for capital gains. However, each couple is only allowed to distinguish one residence as their primary at a time, which is the place they live in all the time. Although, you need to keep a lookout for the value of the asset that you’re considering as principal residence. If its value is higher than your home it would be smart to make or keep it as the primary residence for some or all the years of ownership.

Note that there are times when capital gain tax can result in double taxation for the children receiving the cottage. This happens when the parents sell the cottage to their children at a low price, which is less than the fair market value. In that case, the parents are required to pay tax on the asset’s fair market value and not the low value they gave their children. Furthermore, when the children decide to sell the property in the future, they will pay capital gains tax on the difference between their sale price and the discounted price they bought it for. That is considered double taxation as both families have paid the same tax at a high rate for the same cottage.

Although this can be avoided if the parents sell the cottage to the children at full price and take a promissory note from them for the amount they wish to discount. Afterward, they can forgive the promissory note on death.

Managing Probate Fees

This situation states that the parents decide to leave the cottage in the will of the “last to die”, which will lead to the payment of probate fees on the cottage in some provinces.

Parents should have the cottage in joint tenancy as a primary option and decision, because this step will help avoid the payment of probate fees at the death of the “first to die”.  Some might not choose to keep the cottage in joint tenancy and will leave it in one name only. This will have the surviving parent paying the fees at the death of the “first to die”. In this situation, it’s very important to have a joint tenancy, for in some provinces the amount of the fees that need to be paid can be substantial.

However, if the cottage is in one parent’s name and another parent wants to inherit the cottage, they will have to pay the probate fees as discussed. Besides, if that parent acquires the cottage and then dies, then the fees will be paid again before the children can have it.

Transferring Your Cottage to a Trust

Certain advantages can be benefited from when transferring the cottage to a trust, while the parents are still alive. Advantages like avoiding legal fees related to probate. It also helps the parents make a better decision about whether or not to go with a succession plan. This step helps in testing how well their children are in sharing and managing the property, as well as testing their worthiness of owning the cottage and following the rules.

On the other hand, there are some disadvantages to this plan. Transferring the cottage to a trust will lead to capital gain taxes being recognized. Unless the parents are over the age of 65. Most importantly, this tax is triggered on the 21st anniversary of when the trust was created, which then might be a good idea to transfer the cottage to a Canadian resident child or children, or back to the parents if they are still alive, to avoid any taxes. After that being done, the family is then back to the same position before transferring the cottage. They can use some of the methods we discussed earlier, but some complications might emerge if they want to gain a principal residence exemption.

Choosing a Mortgage or Life Insurance

Let’s state the fact that the children might find it expensive or hard to keep up with the cottage’s expenses. In that case, a mortgage or life insurance might be the best option for you. A mortgage can assist them in paying the purchase cost on the cottage and taxes. In addition to that, getting a mortgage will help the children also recognize the cottage as their primary residence, which will reduce future capital gains tax.

Another option could be for the parents is taking out life insurance payable on death, which can cover all the taxes that need to be paid on the cottage. Of course, the value of the life insurance will depend on the parent’s health and it will most likely be lower than the tax. If in some circumstances some of the children aren’t willing to own the cottage, then the life insurance can be distributed equally, while the other children get the cottage instead.

Establishing a Co-ownership Agreement

A situation might occur where several children want to share the cottage and compromisation needs to be established. In that case, a co-ownership agreement can go a long way considering the facts. The children can set out some terms and conditions to agree on, regarding sharing cost, scheduling time of use, restricting non-family members from use, and much more. It might be easier for the children to write down the conditions and agreements they want to establish among themselves, and then have a lawyer implement the regulations to keep the agreement authentic.

Joint Tenants or Tenants in Common?

Here we have two options that would lead to different outcomes on your cottage’s tax. The first option is owning the cottage as a joint tenant by the children that will have the cottage passed on to the surviving children if one of them dies. Of course, if the value of the cottage increases during the time it’s owned by the deceased, capital gain would be taxable and paid by the child’s estate.

On the other hand, if they decide to hold the cottage as tenants in common, then the deceased child’s share will be considered part of his/her estate and would be distributed according to the will. However, if there isn’t any will, then the share will be distributed on the intestacy of that child. This means that the ownership and any capital gains tax will be in the child’s estate, but the children that remain will own the cottage and the deceased’s estate.

This section should be discussed among the family members so that everyone knows what the next move should be.

In conclusion, passing on a family cottage can be somewhat tricky and time-consuming as they are several regulations and steps that need to be considered. Though as described in this article, some of these steps sound simple and easy to implement. Nevertheless, you should consult a lawyer to discuss the options you have. That way you can keep your asset among your family for more generations to come.


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