FAMILY COTTAGE PLANNING WITH TRUSTS
October 6 2016
Do you have a cottage that you want to transfer to future generations?
Cherished memories you and your children have of building and rebuilding the dock, sleepovers with cousins and family dinners are all reasons to want to “keep it in the family." With that said, additional complexities may arise when a cottage is to be shared among multiple family members.” Also, cottage prices have increased significantly in some areas and owners may be faced with capital gains taxes.
An effective cottage succession plan is needed to ensure the most efficient method of passing the cottage to your children. One option to consider is the use of a trust either now during your lifetime or in your will as part of an overall estate plan.
The ownership of the cottage could be transferred to a trust to be managed by a trustee within the terms of the formal trust agreement. Where the property is transferred to a trust you will be deemed to have disposed of the cottage at Fair Market Value.
Effective use of a trust
Using a trust to hold the family cottage may be appropriate in certain circumstances including the following:
- Where parents would like continued access to the cottage throughout their lives but would like to pass on the future increase in value, as well as the related tax liability, to future generations. The trust agreement should contemplate the ongoing management of the property and who will be responsible for any costs. As part of the trust, the parents may also choose to include a sum of money for the upkeep of the cottage. This contribution to the trust could make up for any of the children who may not be able to pay their share of expenses.
- Where parents feel the children are not able to handle the financial responsibilities or have concerns over existing or potential creditors. Where a trust is considered discretionary, no single beneficiary will own the cottage and therefore does not have the ability to sell the cottage. Creditor protection may also become particularly important where any of the children have marital difficulties. If properly structured, the trust may prevent the cottage from being considered a marital property asset.
- Decision making can be simplified by having the trust in place and having the trustee make the decisions as to use, upkeep and eventual disposal. This would simplify the process of having consensus on sensitive issues. As a general rule, note that for tax purposes a Trust is considered to dispose of all of its property at Fair Market Value on its 21st anniversary and pay all taxes relating to the disposition. However, prior to the 21st anniversary, a trust may “wind-up” by transferring the property directly to its beneficiaries on a tax-deferred basis. The individual beneficiaries will then own the property. Probate fees will be avoided on death of the original owner because the cottage will be owned by the trust and not the deceased!
Planning for the future of your family cottage has many issues and the use of a trust may or may not fit your family’s needs. For more information on the strategies available to assist with cottage succession planning, contact Richardson GMP Investment Advisor.