Every year, we remind our kids of the Christmas story, which my daughter Sarah repeated to me this week. As it turns out, the wise men who came to visit baby Jesus, she said, actually brought gifts of gold, Frankenstein, and myrrh.
As I contemplated the gifts of the wise men this week, it occurred to me that wise men and women today will take the time this holiday to look after the family cottage. After all, it's not often that the entire family is in the same place at the same time. So, use your holiday gathering to talk about the cottage. Here are some tips to help that discussion.
The family cottage is a more emotionally charged asset than just about anything parents can leave behind. This holiday, consider discussing the following questions:
Is there a desire to keep the cottage in the family for future generations?
How will time at the cottage be shared among family members once you're gone?
Who will contribute financially to the maintenance and upkeep of the cottage once you're gone?
What process will be used to resolve disagreements over the cottage in the future?
The answers to these questions are not tax-driven, and so you should be able to discuss these things without a tax professional in the room. The questions of how and when (during your lifetime or on death) to transfer the cottage to the next generation are often tied to the tax implications, so a visit to a tax pro is important.
How the property will be transferred, when it will be transferred, and to whom, are tough questions.
A good place to start is the "to whom" question. It's easiest to eventually transfer the cottage to one child, rather than splitting ownership. This approach simplifies all decision making regarding the property and will eliminate battles over use and maintenance of the cottage. It can also lead to hurt feelings if other children also want use of the property. Discussing this issue when everyone is together can help in your decision.
How should the property be transferred, and when? Before making this decision, sit down with a tax pro and discuss the options. Evaluate each option based on the following criteria: (1) the complexity; (2) the costs of implementation; and (3) the amount and timing of the tax to be paid.
From experience, simple solutions are usually preferred. So, let me share two of the simplest ideas.
1. Where the accrued capital gain is significant, consider buying life insurance to cover the tax bill on death. Have the kids contribute to the cost of the insurance. Buy the insurance on a joint-last-to die basis, so it doesn't pay out until both spouses are gone. (It's cheaper, and can be purchased provided one spouse is insurable.) In your will, leave the property to the kids equally. Discuss today the issues of time- and cost-sharing once you're gone.
2. Where the accrued capital gain and future growth is expected to be significant, consider giving the cottage to the kids as a gift today and using your principal residence exemption to shelter the transfer from tax. Then, enter into a long-term lease with the kids to retain your right to use the property.
Tim Cestnick is managing director, Tax and Estate Planning, at AIC Ltd.
© The Globe and Mail
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