For many families a cottage is a place of special moments, milestones and memories. However, having a recreational property is not always fun and games -- there are also many costs and responsibilities that come along with ownership, especially when transferring the property to your children. To help make sure you're passing along family memories and not cottage tax burdens, here are a few considerations when planning your cottage legacy.
Talk to your children
First things first -- sit down with your children and discuss whether or not they actually want the cottage. In many cases, children enjoy the memories and times spent at the cottage when it was managed by mom or dad, but they may not want the responsibility that comes along with owning the property. Perhaps only one child wants the cottage and the others prefer to receive their portions as a payout instead. When it comes to cottages, fair does not always mean equal so make sure you discuss as a family before making any decisions.
Understand your options
Once you know who you'd like to pass the cottage onto, explore your options. There are different strategies for passing the cottage onto your kids, each with its own set of benefits and risks, so make sure you speak to an expert and understand what works best for your family.
Co-own with your kids
Benefit: Adding your children to the deed and making them co-owners of your cottage could help defer capital gains tax and save money. For example, if your cottage value has increased over time, it would trigger a capital gain on the portion of the cottage that your children now own and you would pay the tax on that now. Down the road, your kids would pay tax on the capital gains from your portion of the cottage they inherit when you die.
Risk: Since you are no longer the sole owner of the cottage, any issue your child experiences may also affect you. For example, if your child has creditors or is going through a divorce, the cottage now becomes part of the asset mix and could be up for grabs.
Gift it now
Benefit: You could give your child the cottage as a gift now, which would trigger a capital gain. While you would have to pay the capital gains tax up until the time you gifted the cottage, you would also be seizing the growth of further gains if the property value goes up.
Risk: On the flip side, if the value goes down, you could be paying more now than you need to. Also, similar to the first strategy, if your kids become owners of the property before you die, you are no longer a sole owner and could therefore lose control of the cottage.
To trust or not to trust
Benefit: A trust is a vehicle that lets a trustee manage the property and its use by beneficiaries. Trusts are meant to be temporary which gives children and trustees time to decide how the cottage will be split -- will one child buy out the others or will it ultimately end up for sale? -- while keeping the property protected from creditors. Also, having a neutral and experienced third party managing the cottage trust in place ensures the cottage is properly preserved for generations, as the children may not have the expertise or desire to manage it on their own.
Risk: Once in a trust, your children could still use the cottage as they see fit, which may not always align with what you have in mind. There are also trustee fees associated with having a professional involved, so it's important to understand what they are and how they work.
Decide what works best for your family
Once you have discussed as a family and explored your options with an adviser, determine which strategy works best for you and put a plan in place that will allow you to continue enjoying cottage relaxation, without worrying about cottage taxation.
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