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Sunday, April 10, 2011

Recipe for a nightmare: take one cottage and leave it equally among all your children

Not long ago I was giving a seminar about estate planning, and I told the group that it was not a great idea for the parents to leave their cottage to all of their children. As I talked about the reasons for my statement, a woman in the audience was nodding enthusiastically, so I asked her if she had some experience in this situation.

She replied that her father had left the cottage to her siblings and herself, and it had been "a nightmare". She said that all wanted to sell it except for one, and the one who didn't want to sell it had moved in and wouldn't budge, so that nobody else could use it.

This was a perfect illustration for the rest of the audience on exactly what can and does happen. Adult children aren't saints. Sometimes they get greedy or stubborn or carry on a childhood rivalry with a sibling. Sometimes they are financially strapped and make weak decisions because of that. It does happen, even in families where people usually get along. Parents who choose to ignore the facts may go blissfully on without realizing there is a problem, but the children are likely to pay the price after the parent passes away.

A parent owning a cottage has options other than leaving the title to the property to all of the children and letting them fight it out. Some of them are:

1. Direct that the cottage be sold with the money split equally among the children.

2.  Include an option for one child to buy the cottage within a set time after the parent's death (say, 60 days). The child can use his or her inheritance to help pay for it. If the child doesn't exercise the option within the time period, another child then gets the option to buy the cottage.

3.  Talk to the children to find out who is most interested in the cottage and leave the cottage to that child. The child would take the cottage as part of his or her equal share in the parent's estate.

If you are dealing with a cottage, make sure that you talk through the logistics of the above ideas - or others - with your estate planning lawyer. Keep in mind that your cottage is unlikely to be your principal residence, so it is subject to capital gains tax. If you leave the cottage to one child or give an option to purchase to one child, be mindful that the capital gains tax is payable by the estate, which will reduce the amount of money in the estate for the other children. Some cottage owners carry life insurance policies to pay those taxes.

The bottom line?  Be realistic and talk through ideas to see if they are really workable.

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