Family Cottage Succession: Planning Considerations
As many cottage owners will tell you, the personal, emotional and financial commitment involved in owning and maintaining a cottage property can be significant. Passing on such a cottage property to the next generation can also involve similar commitments and concerns. Without proper planning, the succession of a family cottage can become the basis for serious family disputes. Below we outline some important considerations and planning options for cottage succession that every cottage owner should know when partaking in such a succession process.
Direct Ownership and Gifts: Joint ownership with the right of survivorship can be a simple yet effective method for cottage property succession, especially between spouses. However, transferring a cottage property into joint ownership or by an outright gift during the owner’s lifetime can trigger immediate capital gains tax consequences if the property is not designated as the owner/giftor’s principal residence, as well as expose the property to claims by the new joint owner’s creditors or to matrimonial claims. If the owner does designate the cottage as his or her primary residence for tax purposes, it would exempt such property from capital gain tax, but this designation would only be worthwhile for those owners whose cottage is anticipated to gain more in value than any other residence they own.
There is also the option of selling the cottage to the owner’s intended beneficiary and taking back a mortgage at the prescribed interest rate. Such a mortgage can be forgiven in the mortgage holder’s will, but the beneficiary/new owner would need to make at least the minimum interest payments if this strategy is to be used. In addition, assuming the property is more valuable on the date of the sale than it was on the date of the acquisition, there would be a capital gain based on the fair market value of the property. However, such tax payable on the gain could be spread over the term of the take-back mortgage, instead of being payable all in one year.
Wills and Trusts: A cottage property can be transferred via a direction in your will to make it an outright gift to one or more family beneficiaries, or by gifting the property in trust. Provisions in the will can also allow for beneficiaries to decide if they wish to own the cottage with other beneficiaries, or if they want to take ownership as part of their share of the estate. Estate administration tax that would be payable if the cottage property passes to beneficiaries through your estate, unless the property would not fall into your estate (e.g., because it is being dealt with by the terms of a trust).
Trusts can act as will substitutes, can provide for the special needs of financially-dependent beneficiaries, can plan for incapacity, and can allow for protection from creditors or marital breakdown. In particular, funds can also be placed in a trust for payment of ongoing maintenance, repairs and other expenses related to the cottage if such property is to be held for a number of years in a trust; such funds can alleviate the direct financial burden on beneficiaries and avoid disputes on how expenses related to the cottage are to be paid.
Co-Ownership Agreements: Where multiple owners are to be named as the beneficiaries of a cottage property, a well-drafted co-ownership agreement amongst such owners can help prevent a myriad of disputes and provide a blueprint for decision-making. Such agreements can contain provisions on how work on the property, use of the property, and payment of expenses towards the property is to be divided and shared. Co-ownership agreements would also deal with matters like the transfer/sale of the property, including on death, incapacity or marital breakdown of one of the owners; in such cases, these agreements would dictate the purchase and rights of first refusal for the other owners with respect to that affected owner’s share of the property.
The viability and desirability of any of the planning options as described above depends on each individual cottage owner’s circumstances. In particular, managing all of the aforementioned potential tax burdens is significant, especially where only some family members will be taking ownership of the cottage, but the remainder of the owner’s estate will be left to different family members (or where there are not enough liquid assets in the owner’s estate to pay off all taxes owing on the owner’s death without the sale of the cottage property).
It would be prudent that cottage owners seek professional legal and financial advice when deciding which option would be best suited for them and their families to ensure a successful ownership transition and the avoidance of family disputes.