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A way to share the family cottage

Strange but true. On December 5, 1997, for the 17th year in a row, hundreds of Thai men underwent free vasectomies to honor King Bhumibol Adulyadej on his 69th birthday. The festivities included free food and drink and a condom-inflating championship. The king has been praised by family-planning organizations for cutting Thailand's population growth rate by two-thirds over the past 25 years.

Population growth has been an issue in our own family, too. When I met my wife six years ago, my mother- and father-in-law had just four grandchildren. Today, they've got fourteen. The problem? My share of time at the family cottage seems to be dwindling. Extrapolating the growth of our family forward, I expect that my share of time at the cottage will be about 1.7 days each year by 2010. I think that my brothers-in-law should have vasectomies -- and I'll pay for them.
The challenges

How are you dealing with the family cottage? If your family has grown like mine, you'll understand the challenge of allocating time at the cottage and deciding who should bear the cost of maintaining and improving the place.

Agreeing on decisions can be a nightmare and can strain family relationships. Further, there's the issue of income taxes. I've seen more than one situation where the family cottage had to be sold just to pay the tax bill arising on the death of the cottage owner.
A solution

Here's one idea that doesn't get enough attention: Setting up a non-profit corporation to hold the family cottage. Consider Jake and Janice, who own a cottage. They have three adult kids who each have two children. Everyone enjoys using the cottage. Jake and Janice were concerned about how the property would be shared once they're gone, so they've set up a non-profit corporation to hold the cottage. Each member of the family is a "member" of the non-profit corporation.

The way Jake and Janice have set it up, there are two classes of membership: Voting and non-voting. Jake and Janice hold the voting memberships while their kids have non-voting memberships. Having a voting membership allows the member to participate in any decisions related to the cottage that require votes; things like whether or not capital improvements should be made to the cottage, or whether the cottage should be sold.

Once Jake and Janice are gone (or otherwise give up their memberships), the kids' memberships become voting. The memberships of the grandchildren will eventually become voting once Jake's and Janice's children pass away (or otherwise give up their memberships) -- and so on.

The bylaws of the corporation dictate how time at the cottage is to be shared among the members of the corporation. And each member is required to pay a membership fee annually. The fees are designed to cover the costs of maintaining the cottage and making any improvements to the property. If a member doesn't pay his fee, he could eventually lose his membership.

There are some real benefits to this non-profit corporation idea. First, you can ensure that the cottage will never be sold if that's your desire.

Next, you can avoid all income taxes and probate fees at the time of death on the property since your "interest" in the cottage will fall outside of your estate if the corporation is properly structured. This can mean a tax-free "transfer" of the cottage to the next generation.

Further, the cottage may enjoy a degree of creditor protection since you'll no longer own the cottage directly. And for those who are U.S. citizens or residents, you can avoid U.S. income, gift, and estate taxes that might otherwise apply on a transfer of the cottage to the kids or others. Finally, the idea works particularly well if there is more than one cottage on a piece of property that has not, or cannot, be subdivided.
Other thoughts

Be sure to consider these issues before jumping on the bandwagon.
1. There could be tax to pay on a capital gain when transferring the cottage to the non-profit corporation. You may be able to shelter this gain with your principal residence exemption or in other ways, but tax advice is critical.
2. There will be professional fees to set up the corporation and to look after the required annual meetings, reports, and returns.
3. Your intention must be to keep the cottage in for the long term because distributing the property to the members of the corporation or winding up the company could result in a big tax hit.
4. Once the cottage is in the corporation, it will no longer be owned by you, which could have implications under family law in your province -- so get legal advice.
Tim Cestnick, CA, CFP, TEP is author of Winning the Tax Game 2002 and Winning the Estate Planning Game. He is managing director, Tax Smart Services, at AIC Ltd.
tcestnick@aic.com

© The Globe and Mail

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