Love Your Summer Cottage
Here’s a story we hear often:
Charlie loves the family cottage – the whole family does! The kids practically grew up there every summer and now it’s the grandchildren. Skiing in the winter is great – marshmallows around the fireplace – such great memories. We want to keep the place in our family forever…
“But how do we pass it along in a fair and equitable way? What happens when Margarite and I die? How do we keep this great opportunity going for our children and grandchildren?”
I know the kids love the place as much as we do and they cherish the time they are able to spend there. But Bobby lives on the West coast and Steve’s family is in Dallas so it’s hard for them to get here as often as they would like, but they do come for a week or two every year. Then there’s Charlie (JR) in the UK who could afford to buy it (and four more like it too). But Sally – she lives nearby with her kids and she uses it the most. How could she afford it if we were gone?
“We don’t want any fighting over the property once we are gone and I don’t want to leave it to Marg to be burdened with this problem. We better come up with a plan now. While my brain is still clear!”
Taxes will be a problem. Dad left us the property in 1963 and there were no capital gains taxes back then. It was worth about $50,000 at the time. We used it “rough and ready” for many years but in the 1990s the area became fashionable. We put in improvements; the addition out back; new roof and windows; widened the hallways; cut back from eight bedrooms to five but made them all bigger with en-suites. Next thing we knew, the tax valuation had gone way up and they were charging taxes on $650,000. And, in recent years it’s been valued at over $1 million. So the taxes at our death will be astronomical: $250,000 or more! How can the kids pay that much? And meanwhile, who is going to open it up every spring and do all the maintenance work? Who will pay the gardeners, repairmen, snow removal, boat and dock repairs?
Let’s approach this logically. Sally is the one who will use it the most. Let’s leave it to her in the will and then leave cash to the others. They may still visit or buy their own country homes. But Sally could use cash to pay off her mortgage. Or we could leave it to all of them in the will. Let them share the expenses and take the gains tax from the estate, leaving less cash.
“Maybe we should sell the place? After all, it’s becoming a real chore to look after and it’s just so difficult to figure out what to do with it.
I guess we need help!”
No two situations are the same and it’s no easy job to decide what is best for your family, but you will need to set out the facts and assumptions.
Income taxes & capital gains may not be as high as you fear!
Firstly, the income taxes on capital gains may not be as high as you fear. Your adjusted cost base for taxes is higher, starting with the V-Day value at December 31, 1971 and then adding in all the costs of improvements, since that date. Can the gain be offset by your principal residence exemption or is it needed for the city house? Did you and Marguerite each own one home? Did you both have a principal residence exemption to 1982? Is the current property tax valuation too high? If so, maybe you could transfer the property now into a trust to provide for its use by all the family members. Then they could all begin to contribute to its care and upkeep and start paying some of the costs. They could begin to decide who really wants to use it. But you would have to pay income taxes now and future growth in value would be taxed in the hands of the whole family, instead of being added to your tax bill upon death. That might save a lot.
Should you leave the property in trust or in your will? Or maybe just let one of them step forward and pay FMV?
Or you could leave the property in trust in your will, with some cash to pay the next ten years of expenses. This might make everyone happy but they would all inherit less money and may not get equal enjoyment from the home. Or maybe you should just leave the home to all of them in the will and let them decide what to do. Let any one of them step forward and pay fair market value to buy if from the estate.
Sell the cottage now?
Or why not sell it now? No one’s getting full use of the property and you are still doing all the work. This would leave more cash for everyone and they could then buy their own country homes.
How can you pass along such great memories tied to your country home? Is it really up to you to come up with a plan? Is it just your dreams and memories that you are trying to preserve? You’ll need to sit down with your advisors to decide what’s best for you and your family.