Making changes to your family cottage estate plan
By AdvocateDaily.com Staff
In the third instalment of a four-part series on transferring ownership of the family cottage, Winnipeg wills and estates lawyer Cynthia Hiebert-Simkin discusses how changes in life circumstances should affect a cottage estate plan.
As lives are lived, the circumstances and needs of both testators and beneficiaries can change, necessitating reflective updates in the estate plan, says Hiebert-Simkin, partner with Tradition Law LLP, Estates and Trusts.
“It’s worth sitting down and figuring out some of the permutations and issues that might come up," she says. "The more you address now, the easier it will be later on because you’ve already turned your mind to it.”
One of the most common changes she sees involves parent-owners who decide they must sell the cottage in order to fund their retirement.
“Of course, they can choose to sell the cottage in their own lifetime, regardless of any previous decision to give it to one or more family members,” Hiebert-Simkin says. “But when the family is having those discussions, it should be made clear that the gift is always going to be subject to the parents’ need, and the fact that they might need to sell.”
Wills with specific provisions relating to the cottage can easily be altered or removed in these cases, as long as the testator remains competent, she says. Otherwise, the gift will generally lapse in the absence of the cottage’s existence as part of the estate.
“But it would be wise to include a provision that the gift of the cottage is subject to the testator actually owning it on the date of death,” Hiebert-Simkin says. “That way, it makes it clear that it lapses if the cottage has been sold."
Even if parents have enough assets to get them through the last years of their lives without selling the cottage, Heibert-Simkin says they may not want to bear the maintenance costs if they’re no longer able to use it.
“There should be discussion about whether it’s fair for them to pay the expenses associated with an asset they are no longer enjoying,” she says. “The children may want to take responsibility for those.”
In some cases, a solution could involve the owners selling or gifting the cottage to their intended beneficiary ahead of their deaths, but Hiebert-Simkin warns that such a transaction would likely leave the parents liable to capital gains tax on the fair market value of the property.
“Because it triggers a tax that the parents actually have to pay, it’s a good idea for the buyer to pay them some money,” she explains. “There also needs to be a consideration of what’s in the existing will, and whether it needs to be adjusted to deal with the issue of fair treatment of all the children.”
Cottage owners who account for contingencies in their wills may also want to address the issue in their other testamentary documents, including those for powers of attorney or the appointment of substitute decision-makers, depending on what province they live in, Hiebert-Simkin says.
For example, she says an attorney for property could be given specific instructions regarding the sale of an incompetent person’s cottage.
“It might state the property should not be sold unless it’s required to meet the parent’s needs, but that the expenses should be paid by the children using it."
The attorney might also be given the power to gift the cottage to a child under certain circumstances, though Hiebert-Simkin says such a clause could be complicated by the attorney’s overriding duty to act in the incapable person’s best interests.
“You have to ask yourself whether it’s fair to be gifting such a large asset if the parent-owner is incompetent,” she says. “Sometimes it won’t be an issue, because the parent has sufficient other assets, but for others, it will be more significant.”
If the power of attorney document is silent on these issues, Hiebert-Simkin says the attorney will be guided by the incompetent person’s best interests, which may result in a sale of the cottage on the open market.
“That doesn’t mean that a child can’t buy it, but they may have to compete with other would-be purchasers out there,” she says.
In some jurisdictions, Hiebert-Simkin says legislation may dictate the treatment of proceeds from such a sale.
“When it comes to the administration of the estate, it may be that the person who was supposed to get the land instead gets a portion of the sales proceeds,” she says.
In rarer situations, Hiebert-Simkin says an intended beneficiary may decide they no longer want a cottage.
“Maybe they’ve bought their own, or just decided they don’t want to be responsible for it,” she says. “If that happens during the owner’s lifetime, it’s very straightforward for them to sign a new will or a codicil taking the gift out.”
Things get slightly more complicated if the beneficiary has a change of heart after the parent becomes incompetent or following their death.
“Then it has to be dealt with in the administration of the estate,” says Hiebert-Simkin, adding that no beneficiary is obligated to accept a gift made to them in a will.
“In those cases, the person can sign a disclaimer saying they don’t want the gift, but they need to be careful that they are only disclaiming the gift of the cottage, and not any others they might be entitled to under the will,” she says.
Stay tuned for part four, where she will discuss the dangers of joint ownership.
To read part one, why communication is so vital, click here.
To read part two, the cost of a cottage estate plan, click here.