Estates & Wills & Trusts

Plan early for transfer of family cottage

By Staff

While the family cottage is generally a place filled with happy memories, the significant sentimental and financial value that some attach to the property may lead to contentious estate battles upon the death of its owner, Toronto estates and trusts lawyers Ian Hull and Suzana Popovic-Montag write in The Huffington Post.

As Hull, co-founding partner of Hull & Hull LLP, and Popovic-Montag, managing partner of the firm, explain, the fact that cottages are often owned for generations can mean family members have developed an emotional attachment to the property, and it may be difficult for everyone to treat it in a rational fashion as they would any other estate asset.

“Thinking about the cottage in an emotional rather than rational way may cause additional difficulties for individuals who find themselves in a fight over the property. Furthermore, with the recent boom in the real estate market, the transfer and/or sale of a vacation property can result in onerous tax liabilities for one’s estate or the individual(s) in receipt of the vacation properties. To assist in avoiding complications regarding the inheritance of a family cottage, it is advisable to plan for its disposition well in advance of the death of the owner of the property,” they write.

As such, Hull and Popovic-Montag say there are a number of steps to take when planning for the transfer of a cottage, including having an open discussion with the intended beneficiaries. Once the owner knows the honest wishes of his or her heirs, he or she will be in a better position to decide how to best distribute a beneficial interest in the property, they explain.

“While the property may be important to the testator and have a significant emotional meaning, that connection may not necessarily transfer to one’s heirs with the property itself. While adult children may enjoy using the property, it does not mean that they are interested in looking after it or sharing it with their siblings,” they explain.

In this type of situation, Hull and Popovic-Montag say it may be helpful to engage a mediator to assist in coming up with a sharing arrangement for the property so the next generation can enjoy the cottage in a mutually agreeable way.

In addition, they write, it is important to consider the tax implications of passing on the property.

“As the cottage is generally a secondary property (i.e. not a matrimonial home or principal residence of the testator), taxes typically need to be paid upon the transfer. The main exception to this general tax consequence, however, is if you leave the property to your spouse, as taxes will be deferred until the death of the spouse.”

Also, given that most cottages have appreciated in value since being acquired by the family, the estate or the beneficiary of the property is likely to receive a significant tax bill due to the taxable capital gain, they explain.

“Under the capital gains tax rule, 50 per cent of the increase in value of a property, referred to as the ‘capital gain’, is taxable at the highest marginal tax rate. Therefore, it is important for the testator to consider if there will be sufficient funds in the estate or otherwise available to the beneficiary of the cottage to pay the tax liability upon its transfer,” write Hull and Popovic-Montag.

There are ways to manage the potential burden of capital gains tax, they write, such as through the use of life insurance, or by transferring the property during one’s lifetime by way of gift, making an heir a joint owner on title or transferring title to the property to a trust with the heirs as beneficiaries.

“By purchasing life insurance, the estate will receive a tax-free death benefit, the proceeds of which can be used to pay the capital gains tax liability and any other administrative fees and expenses associated with the settlement of the estate, including the transfer of the property,” explain Hull and Popovic-Montag.

Transfer can also be done on death by way of joint tenancy, which will trigger capital gains taxes at the time the joint tenant is added to the title if the transfer is not to a spouse.

“Upon the death, the property will pass directly to the surviving joint tenant(s) and no further capital gains taxes or probate fees will likely be payable,” write Hull and Popovic-Montag.

Transfer on death can also be done by will, which will avoid payment of land transfer taxes, but may expose the estate to significant estate administration and capital gains taxes, they explain.

“A testator may consider leaving a cottage to the child who uses it, and making gifts of equal value to his or her other children. If it is intended that the next generation share the cottage property, it can be left to all children as tenants in common. The will may also give a right of first refusal to one or more children,” write Hull and Popovic-Montag.

One final option to transfer property upon death is through a testamentary trust, established pursuant to a will, which results in the trustees named in the will holding the cottage in trust for use by one or more beneficiaries.

Ultimately, no matter which path a testator takes, it is always best to plan in advance and begin the process by having a discussion with the intended beneficiaries to determine who has an interest in keeping the cottage, explain Hull and Popovic-Montag.

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