Hello;
As another cottage season is well underway, we are always reminded of how many fond memories and good times have been had there, and how many friendships have been formed over the years. It's also an opportunity to reflect on who will take over the cottage when the owner passes away. Will the cottage stay in the family? Do all the children enjoy spending time at the cottage? Can all the children afford to maintain the cottage and share equally in the physical labour required to keep it looking beautiful? Do the children share your vision of the cottage as a gathering place for extended family or does each child prefer to divide the weekends up so they can use the cottage for their immediate family and friends?
These are all valid questions to ask and the answers will vary by family. There are four main options for dealing with the cottage or any other second home like a ski chalet or family farm.
Option #1: Sell it
This is the simplest option. Once all the taxes and transactions costs are dispensed with, the proceeds can be given to the children and the monies can be used to purchase their own cottages if they wish. Obviously, the dream of keeping the property in the family for the enjoyment of future generations is lost.
Option #2: Gift it
This option allows you to assume the responsibility of paying taxes on the increased value of the property from the purchase date. Rather than gifting the property outright, consider selling it to the kids using a promissory note. If the goal is to make the cottage a gift, you do not have to collect on the promissory note and can forgive the note upon death without tax implications. If you structure the note properly, the tax on the "sale" can be paid over a 5yr period of time rather than all in one year, using what's known as the capital gains reserve. Speak to a qualified tax advisor for more information. However, once you transfer the cottage to your children, keep in mind that you lose control over the asset and what happens to it. The children may sell the property, or it may be exposed if a child goes through a divorce or bankruptcy.
Option #3: Pass it on in the will
You can choose to bequeath the cottage directly to your heirs in your will or put the cottage in a trust with each child owning a portion of the trust. There are fees associated with the creation and administration of a trust that might make this option less attractive. On the other hand, leaving the cottage in a trust would alleviate the issue of the property being exposed during any legal disputes the children might be involved in such as bankruptcy or divorce.
Option #4: Buy Permanent Life Insurance
On death, the tax free proceeds from the life insurance can be used to pay the capital gains tax owing on the increased value of the cottage while in your possession. If the cottage is in a trust, the trust could be the beneficiary of the life insurance proceeds and use it to pay the tax. You might also consider buying enough insurance to help fund all or part of the future annnual maintenance costs.
If you require further information, please feel free to contact us.
Sincerely,
Mani Fenili
The comments contained herein are a general discussion of certain issues intended as general information only and should not be relied upon as tax or legal advice. Please obtain independent professional advice, in the context of your particular circumstances. This article was written, designed and produced by Mani Fenili for the benefit of Mani Fenili who is a Finanacial Advisor for Brandon Lindsay Insurance Agencies, a trade name registered with FundEX Investments Inc., and does not necessaRiLY reflect the opinion of FundEX. The information contained in this article comes from sources we believe reliable, but we cannot guarantee its accuracy or reliabilty. ThE opinions expressed are based on an analysis and interpretation dating from the date of publication and are subject to change without notice. Furthermore, they do not coNstituTe an offer or solicitation to buy or sell any securities. Mutual Funds provided through FundEX Investments Inc.
