Building your Financial
Success
With Alain Aube
Estate Planning
When cottage life passes you by - what then?
You could count on it. As the days lengthened and the weather warmed,
your children would ask ever more frequently, "Is it time yet to leave
for the cottage? Is it? Is it?"
But, that was years ago. Their lives have changed and so has yours. This
summer, as you sit on the dock enjoying another in a seemingly endless
procession of gorgeous sunsets, those changes may have you contemplating
that final sunset - the day you decide to end your weekend excursions or
extended summer stays at your vacation property. If so, you're probably
wondering what to do with your cottage or cabin. To help give some
direction to your thoughts, here are a few questions you should address.
Should I give the cottage to the kids? It's natural to want to keep a
place of warm memories and happy times in the family. Yet, it's also a
mistake to assume all your adult children will automatically enjoy
flocking to a cottage they now own.
As you've undoubtedly discovered, owning and maintaining a vacation
property is a big responsibility - and your children may not want to
take on that responsibility. That's why it's essential that you talk
with them to see whether any of your children want a future ownership
share.
If you don't ask them, here's what could happen: Let's say you bequeath
an equal share of your cottage to each of your three children, but two
of them have no desire to share in the ownership and want to sell the
property. Your third child would like to retain ownership and use of the
property, but lacks the capital to buy the others out. The result? Your
good intentions go for nothing because the majority rules, the property
is sold and your third child is disappointed.
One way to avoid disputes is to bequeath the property to the child who
wants it, and bequeath other estate assets to your other two children.
If estate equalization becomes an issue, permanent life insurance may be
the solution.
Are there tax implications if I bequeath the property to my children?
Yes, and potentially steep ones. If you are using your principal
residence exemption on your home and your vacation property has
appreciated in value, there could be a significant capital gains tax
liability upon your death. Unless you are passing assets to your spouse,
when you die you're considered to have disposed of all your capital
assets at fair market value - and that includes your cottage.
Can I protect my beneficiaries from excessive taxation or other estate
debts?
There are a number of ways you can cover or reduce capital gains taxes
and other estate debts (such as any remaining mortgage amount on your
cottage). Permanent life insurance is an ideal option. It can provide a
ready source of cash that will allow your executor to deal with estate
debts and pay taxes, including those on your vacation property, without
having to sell assets to raise the necessary money to cover these
expenses.
You could also choose to transfer some or all of your property during
your lifetime. Gifting the property to your children, or making one or
more of them joint owners, creates a disposition for tax purposes. While
either strategy could trigger an immediate capital gain, future gains
will accrue to the new owners.
Whatever your decision about your vacation property, it should fit into
your overall estate plan. That's why it's a good idea to seek the advice
of a financial planner in mapping out the best cottage succession plan
for your situation.
