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Transferring The Family Cottage

The family cottage should invoke memories of warm weather, sunshine, and happiness. Unfortunately, for some, estate battles or family fights surrounding the cottage can tarnish these positive memories upon the death of the owner of the property.
Wooden dock on autumn lake
Wooden dock on autumn lake

The family cottage should invoke memories of warm weather, sunshine, and happiness. Unfortunately, for some, estate battles or family fights surrounding the cottage can tarnish these positive memories upon the death of the owner of the property.

Family fights over the cottage property may be contentious, as cottages can hold significant financial and sentimental value. Generally, cottages have been in the family for generations, and family members may develop an emotional attachment to the property, making it difficult for people to treat it in a rational fashion, as they might in respect of any other estate asset. Thinking about the cottage in an emotional rather than rational way may cause additional difficulties for individuals who find themselves in a fight over the property. Furthermore, with the recent boom in the real estate market, the transfer and/or sale of a vacation property can result in onerous tax liabilities for one’s estate or the individual(s) in receipt of the vacation properties. To assist in avoiding complications regarding the inheritance of a family cottage, it is advisable to plan for its disposition well in advance of the death of the owner of the property.

Steps to Take When Planning for a Transfer of the Cottage Property

The most important step in planning for a cottage or vacation property transfer is to have an open discussion with your family or other intended beneficiaries. While the property may be important to the testator and have a significant emotional meaning, that connection may not necessarily transfer to one’s heirs with the property itself. While adult children may enjoy using the property, it does not mean that they are interested in looking after it or sharing it with their siblings. If you plan to leave an equal share in the family cottage to all children, but some want to keep it and others would rather sell it, the property may be sold instead of staying within the family against your own wishes and those of your children. It may be helpful, in this situation, to engage a mediator to assist in coming up with a sharing arrangement for the property so that the next generation can share the cottage in a mutually agreeable way. Once the owner of the family property knows the honest wishes of his or her heirs, he or she will be in a better position to decide how to best distribute a beneficial interest in the property.

Aside from determining which family members may or may not want the family cottage, it is important to consider the tax implications of passing on the property. As the cottage is generally a secondary property (i.e. not a matrimonial home or principal residence of the testator), taxes typically need to be paid upon the transfer. The main exception to this general tax consequence, however, is if you leave the property to your spouse, as taxes will be deferred until the death of the spouse. It is likely that most cottages have appreciated in value since being acquired by the family, resulting in a significant tax bill for the estate or the beneficiary of the property due to the taxable capital gain. Under the capital gains tax rule, 50% of the increase in value of a property, referred to as the “capital gain”, is taxable at the highest marginal tax rate. Therefore, it is important for the testator to consider if there will be sufficient funds in the estate or otherwise available to the beneficiary of the cottage to pay the tax liability upon its transfer. If the estate does not have enough money, the intended beneficiaries of the cottage could inadvertently lose a cherished family asset.

One way to manage the potential burden of capital gains tax is through the use of life insurance. By purchasing life insurance, the estate will receive a tax-free death benefit, the proceeds of which can be used to pay the capital gains tax liability and any other administrative fees and expenses associated with the settlement of the estate, including the transfer of the property. Another way to manage the capital gains tax is by transferring the property during one’s lifetime. This can be done by way of gift, making an heir a joint owner on title, or by transferring title to the property to a trust, with the potential heirs as the beneficiaries of the trust. These options may create an immediate capital gain and trigger tax payable by the transferor, but any future capital gains will accrue to the next generation, rather than becoming payable during their lifetime if they retain the property.

If capital gains tax is not a concern to the testator, or the tax liability is intended to be paid using life insurance proceeds, the testator may decide not to transfer the property before death.

Transfer on death can be done by way of joint tenancy, which will trigger immediate capital gains taxes at the time the joint tenant is added to title if the transfer is not to a spouse. Upon the death, the property will pass directly to the surviving joint tenant(s) and no further capital gains taxes or probate fees will likely be payable.

Transfer on death may also be done by Will. Gifting a cottage property pursuant to a Will will avoid payment of land transfer taxes, but may expose the estate to significant estate administration and capital gains taxes. A testator may consider leaving a cottage to the child who uses it, and making gifts of equal value to his or her other children. If it is intended that the next generation share the cottage property, it can be left to all children as tenants in common. The Will may also give a right of first refusal to one or more children.

A final option to transfer property upon death is through a testamentary trust, established pursuant to a Will. This will result in the trustees named in the Will holding the vacation property in trust for use by one or more beneficiaries. The terms of the trust may include a number of provisions governing use of the cottage, payment of related expenses, and subsequent transfers.

There are many considerations and possibilities in determining which heirs will receive the cottage property upon death and how and when the property will be transferred. No mater which path a testator takes, it is always important to begin the process by having a discussion with the intended beneficiaries to determine which children have an interest in keeping the cottage property It is best to plan in advance for the disposition or transfer of the property, so that a family fight is not caused by the very property that is meant to leave lasting positive memories on the entire family.

Ian Hull and Suzana Popovic-Montag are partners at Hull & Hull LLP, an innovative law firm that practices exclusively in estate, trust and capacity litigation. To watch more Hull & Hull TV episodes, please visit our Hull & Hull TV page.

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