Handing down the cottage is a challenge facing many families in the South Georgian Bay area where many properties are secondary homes for their owners. Recently, I had the privilege of spending some time with Geoff Parker of Stonehaven Financial Group Inc. discussing some of the various issues surrounding succession planning for such properties. Geoff kindly agreed to share this information with my readers which is presented as a four part series; this is the last. You can read it all starting at Part 1.
Keeping the cottage in the family has a cost. Whatever the strategy you employ there will be a cost associated with it. You can potentially reduce the capital gains tax payable, but rarely can it be totally eliminated. So what will be the source of the funding.
If the value of your cottage represents a small percentage of your total wealth, say 10%, then it is likely that you will have other assets that can be liquidated to pay the tax and/or equalize the estate distribution. On the other hand, if its value represents a significant percentage of your net worth, one third for example, liquidity becomes an issue.
If your family can afford to “buy” the cottage from you for the value of the tax payable, then to a degree the problem is addressed. If they can’t then again, what can you do?
One strategy is to set up a sinking fund. You simply open a bank account and when your family members arrive at the cottage for a weekend or a week, you present them with an invoice. Perhaps you charge them $100 for a weekend and $1000 for a week. The monies you collect are deposited into the bank account and “saved”. Over time the deposits will accumulate and in ten or fifteen years there should be sufficient funds available to pay any tax bills. Essentially your family “buys” the cottage from you over an extended period.
Another strategy is to purchase a joint-last-to-die insurance policy. While this strategy does have an ongoing cost, it is the least expensive and most effective way to generate the cash needed to pay a future tax bill and equalize your estate. As an example and in rough terms the premiums for a $100,000 death benefit will cost approximately $40,000 for a 75 year old couple in good health over their remaining lifetime. That equates to about $3000 per year. The premiums could be paid by you or by the family members who are to inherit the cottage.
Keeping the cottage in the family is a major, but not insurmountable challenge. A family dialogue is crucial in order to avoid assuming what family members want. You may want to deal with it in the broader context of an overall estate plan and not in isolation. Whatever you decide to do about your cottage will impact decisions concerning your overall estate and vice versa. You should also seek the advice of professionals – financial planners, tax accountants, wills and estate lawyers. Yes, there will be a cost, but it will be less than the tax you will save and the lawyers fees you and/or your family may pay, if litigation results. And by doing so you may also be able to preserve the family.
If you have any questions for Geoff about ownership structures or cottage succession planning, please feel free to email him at firstname.lastname@example.org or contact him via his website at www.geoffreyparker.ca.
This article was prepared by Geoffrey Parker who is an Investment Advisor & Certified Financial Planner with Dundee Securities Corporation., a DundeeWealth Inc. Company. This is not an official publication of Dundee Securities Corporation and the author is not a Dundee Securities analyst. The views (including any recommendations) expressed in this article are those of the author alone, and they have not been approved by, and are not necessary those of Dundee Securities Corporation.
Marg Scheben-Edey is a Broker with RE/MAX four seasons realty limited, Brokerage in beautiful Collingwood, ON. With three decades of experience, Marg is a leader in the local real estate marketplace and is ready to help guide both Buyers and Sellers in achieving their real estate goals. Email Marg