A family cottage might be one of those love/hate things we go through in life. You love the memories, time with the family and time away to decompress, but maybe, hate the challenges of future planning as you try to come to terms with how you deal fairly with this asset in your Will for the benefit of your family. This is a never-ending question. Everyone thinks they will consider planning options and make the tough decisions when they have spare time, while they are at the cottage, but the dock and all the other wonderful distractions make this next to impossible! And so, this question persists and needs to be dealt with now.
Owning the cottage in joint name with your spouse defers probate and capital gains to the second to die. With adult children however, the earlier practice of owning an asset jointly with them served to protect against probate. But, simply putting the cottage in joint name with your adult child/children is not that simple. Court cases and their resultant decisions have challenged this desired result. The courts might see the ownership as legal ownership but not beneficial ownership. This will keep the asset in the parent’s estate which won’t provide the protection against probate as expected. Additionally, this transfer, if not handled as agreed upon by all beneficiaries, opens the transfer up to the risk of estate challenges by your beneficiaries on your death. To help prevent challenges, estate intentions should be clearly documented at the time of transfer and ideally clearly communicated to all the beneficiaries so there is no misunderstanding of distribution intentions. Other concerns of ownership transfer to a child, are capital gains tax (unless a portion of time is sheltered by the principal residence exemption), along with the risk of exposing the asset to present or future creditors of your child.
Putting those concerns aside for a moment, do you know if any or all of your children even want to own it and/or have the financial means to maintain it? Discussing with each of your children, how they feel about the cottage and whether they would like to have it passed to them, is a valuable conversation to have. It could determine the need for any succession planning and including trusts in your Will to hold the cottage or simply having it sold on your death with the proceeds forming part of your estate to be distributed in line with your Will. And maybe, provide your children with the assets to buy their own cottage?
The use of trusts can be helpful to protect against probate such as Joint Partner trusts (JPT) if spouses are 65 years of age or Alter Ego Trust if there is no spouse. Assets can be transferred into these trusts on a tax deferred basis. However, upon death, capital gains tax is payable (just as it would have been if it stayed in your name). Trusts will provide flexibility, asset protection and tax deferral opportunities but they do come with set up costs, and annual filing requirements.
Considerations & Planning
With all of the above considerations, unfortunately capital gains tax is still present. The purchase of life insurance can help with providing the estate with liquidity to pay for taxes if needed, or you can consider selling your interest, ideally at market value to your children over 5 years. This will allow you to spread out the reporting of capital gains over 5 years on your return.
Lots to consider, but there will be an option that is best suited for your family. With communication and persistence, it will be found. For now, it is cottage season, so if you haven’t done so already, now is certainly the time to enjoy the beckoning of the dock and to plan for the protection of this valuable asset for your family with the help of your Trusted Advisors.