Primer on cottage succession planning

Here in Newfoundland we're up to our knees in snow, and I'm sure it's much the same across the country. Nothing makes us dream of summer cottages and kayaking on a glassy lake like a good old Canadian winter. With cottages, lakes and fishing poles on our minds, it seems like a good time to consider the future of our summer hide-aways. Click here to read an article by lawyer Matthew J. Wilson that is a great primer on the issues you need to consider before taking any steps to leave your cottage to anyone. Those of you who have already made wills leaving your cottage to all of your children jointly (and I know you're out there), please read this article and ask yourself how realistic your plans really are.

Passing the torch to the next generation

There's a good article in www.globeadvisor.com that talks about several issues relating to passing your estate on to your children. It covers a bit of everything, from choice of executor to life insurance, but the main topic is saving on taxes when passing on property. I wish more people would read articles like this one before going ahead with steps like putting their children's names on the cottage.  Click here to read the article.

Take the Tax Sting Out of an Inherited Property

We hear a lot these days about inherited cottages and their tax implications. Attached is an article from the Globe and Mail's Tim Cestnick that will help clarify this issue. Click here to read it.

Passing on the Family Cottage

One of the areas in which I think many individuals and couples are wilfully unaware of the pitfalls of their actions is dealing with the family cottage. They want to "keep it in the family", which is understandable. They decide to leave the cottage to all of the children equally, ignoring the fact that the kids have different personalities, different financial resources and different wishes. They don't even consider alternative solutions because this way is just so easy to set up and on the face of it seems fair to all.

Unfortunately this common plan for the future of the cottage that could bring nothing but headaches to their children. There are better solutions available that won't end up costing the children their relationships with each other.

This new article by Elaine Blades in http://www.capitalmagazine.ca/ talks about leaving the cottage to the next generation and offers some practical advice and ideas. Click here to read it. If you want to toss around some ideas for leaving your own cottage to your children, talk with your estate planning lawyer.

The attached photo is also from http://www.capitalmagazine.ca/.

Purchasing a vacation property in the US

Many Canadians are thinking about buying vacation homes in the USA. If you're one of them, would you be interested in knowing what a Canadian accountant with 25 years of experience might say about it? If so, click here to read this article by Mark Goodfield, an accountant who blogs at http://www.thebluntbeancounter.com/ . Photo from http://www.dreamstime.com/ .

Talk to the kids before leaving them your cottage

I sometimes wonder whether my constant warnings to parents not to leave their cottage to ALL of their children are falling on deaf ears. I worry about the families who have taken that step. I was pleased to see a new article by Tim Cestnick of the Globe and Mail that gives some excellent, practical advice to parents who are considering dealing with their cottage this way. Click here to read the article.

Another cabin nightmare

The readers are keeping me busy with plenty of good questions these days! Here's another, which the reader referred to as "another cabin nightmare". I would certainly agree with that title.

"My mother in law owned a cabin and put the names of her 4 sons on the title. I am assuming that they are joint tenants. She passed away in 2010 and in her will it says she give, device and bequeath her property at the lake to her four sons in equal share. How can that be when they are already registered owners of the property? We are now working on her estate and the accountants say that there is $15K of capitals gains payable on the cabin. Is this right that the total capital gains has to be paid or should it only be on 1/5 of the value. She did not sell but gifted."

You're right that if the cabin was already in the names of the sons, the mother's will isn't able to transfer the cabin to them. Nobody can transfer something they don't own. The clause you mention doesn't actually transfer the title but does no harm. My guess is that the mother made the will before she transferred the title, just in case she passed away before making the change to the title. She probably just wanted to make sure that the cabin went equally to the sones. This is pretty common. It's also possible that she was told about the new rules regarding inter-generational joint property and wanted to confirm her intention to pass the title.

As for the capital gains, I am not in a position to gainsay an accountant's calculation of what is owing. In fact, I rely on accountants in my own practice to determine tax amounts owing. It's possible, in fact it's quite probable, that when the title transferred to the sons, there was no capital gains tax paid at the time, and therefore it's all still owing from back then. Your best bet is to ask the accountant for clarification of the period of time that the tax covers. Not having seen the will or any other information about the estate, the best I can do is let you know about the general rules, which you can then use to talk to the advisors working on the estate.

The fact that the property was gifted rather than sold doesn't make any difference to taxes. Both sales and gifts are considered "dispositions" for Canada Revenue Agency's purposes.

I think you will find that once you have a bit more information, the tax situation will become more clear. The executors did exactly the right thing in hiring an accountant to help with taxes. Unfortunately, once the estate is settled, the sons are just beginning the real cabin nightmare. From this point on, they will have to be unanimous in all decisions regarding usage, maintenance and sale of the property. That is impossible for most families to achieve.

List your cottage? Four reasons you should sell

Is all the upkeep, cost, family squabbles and estate tax issues worth it? This is the question that the author,Ted Rechtshaffen, talks about in this article. Click here to read it.

Why holding the family cottage in a trust can make sense

The question about how to pass the family cottage on to the next generation continues to generate quite a bit of discussion. I found the attached article from Tim Cestnick of the Globe and Mail really useful. It explains the benefits of holding the cottage in a trust while you're alive. Click here to read the story.

Don't let the taxman into your cottage

I'm pleased to see this article by Patricia Lovett-Reid of the Financial Post, because too few people consider the tax consequences of buying and selling a recreational property. Click here to learn more about this important subject.

Passing on the family cottage - Part 1

This article is part 1 of 2 about the challenges of leaving your family's vacation cottage to the next generation. The author, Elaine Blades, does a great job of capturing the thought process (or lack thereof) of many people who are in this position. Click here to read the article. I'll be sure to post part 2 when it appears.

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.

Tax implications of owning a recreational property

In this article, lawyer Douglas Gray goes into some detail about taxation of persons who own recreational properties when those properties are sold or the owner passes away. Taxation is one of the biggest challenges for a family trying to complete its estate plan with a recreational property in the mix. There are other issues too, as I've blogged about before, but the taxes and their impact on your estate are definitely something you have to consider. Click here to read the article. And please, always make sure that you crunch YOUR numbers with your accountant before relying on general advice.

The Heirs of Wrath - Steinbeck's estate

The estate of writer John Steinbeck is one of many to succomb to family fighting. His heirs, not surprisingly, are scrapping over the estate. I say this is not surprisingly simply because there are so many estate disputes these days, it doesn't shock me anymore.

When I give seminars, I always start off by telling my audience that I'm going to show them how to take a defensive position with their Will. In other words, the idea is to make a Will that deflects trouble by making sure that nothing can be read two ways, there are no gaps in the planning, and everything works together. Sometimes my "defensive position" spiel earns me a look that clearly says the listener thinks I'm looking for trouble where none exists. In fact, lawyers in general have been accused of making things sound worse than they really are so that I can "line my own pockets". If that were my goal, believe me I wouldn't be out there preaching about defensive positions, I'd let everyone make a huge, unrestrained mess of their Wills and then charge a fortune for cleaning it all up.

To convince skeptical listeners of the importance of solid planning and paying an experienced lawyer for a top-notch drafting service, I tell stories about estates that I've seen. I spent many years as an estate litigator before taking my current job, so I've seen my share of family feuds. I tell plenty of those you-won't-believe-what-happened-to-this-poor-unsuspecting-guy stories, and they are all true. Using famous people such as Steinbeck as examples works well.

I believe that in the Steinbeck case, it's a small property that he considered a getaway that is a source of trouble. People might be surprised to know just how often the family cottage, lake lot or time share can be a huge problem. If you own one, PLEASE discuss it with an estate planning lawyer. There are tax implications that you might not have considered, both on your transfer of the property to your kids, and again when they sell or transfer it themselves.

There are also all kinds of logistical nightmares that owners are remarkably naive about; when you leave your cottage to all four of your kids and expect them to "share" it, are you sure that only one will want to use it on the July 1 long weekend? Have you thought about what happens when someone won't pay his/her share of the repairs, or what happens when one wants to build a dock/pave the driveway/put in a satellite dish, and the others won't hear of it?

If this post doesn't convince you that owning a cottage means extra estate planning to ward off serious future disputes among your family, let me tell you a few stories...

Passing Down Vacation Property to Family

Interested in knowing what's involved in handing your vacation property down to your kids after your death? Most estate planners will agree that planning for the cottage or lakeside villa is complicated. This article will give you some food for thought. In my opinion, there are more options than those mentioned in this article, but this is a good place to start. Click on the link below to read the article.

Passing Down Vacation Property to Family

Article and attached photo are both from boomer-living.com.

Four Reasons to Sell Your Cottage Now

Attached is an article from the Globe and Mail that talks about reasons to sell your vacation property or cottage. Not all of the reasons are about estate planning, though the author does touch on that. I have to say, I agree with him that having a cottage does complicate your estate planning process. Click here to read the article.

Attached photo by Fred Lum is also from that article.

Does my Enduring Power of Attorney cover my out-of-province property?

Plenty of Canadians own vacation properties, second homes or cottages in other provinces, or outside of Canada. Of course they have to deal with transferring the title to these properties in their Wills, but they also have to make sure that the properties are covered by an Enduring Power of Attorney (aka Continuing Power of Attorney, or Durable Power of Attorney).

The person acting under the Power of Attorney may need to sell the property, pay the property taxes, do repairs, rent it out or otherwise deal with it while the owner is mentally incapacitated. Planning for incapacity should be done at the same time as planning your Will.

If a Power of Attorney is made in Canada, will it have any jurisdiction over a winter home in Arizona? If the Power of Attorney is made in Manitoba, will it cover the lake cottage in BC? Not only does the law of any given province differ from American law, the laws of each province and territory is different. It's very risky to assume that a document made in one place will be of any use in another place.

So how does an individual make sure that he or she is giving the correct legal authority to someone under an Enduring Power of Attorney? The safest bet is to prepare an Enduring Power of Attorney in your usual place of residence, then prepare a second one in the province or state where you own your vacation or lake property. The second one will deal ONLY with that vacation or lake property.

Make sure that both of the documents make reference to each other. If you don't, you may accidentally revoke one of them, as normally each new Enduring Power of Attorney revokes all previous ones.

Who inherits the cottage at the lake?

A good article from AARP on reducing family squabbles by putting estate plans in writing. Click here to read the story.

The Many Complications of Cottage Ownership

My latest article called `The Many Complications of Cottage Ownership` is now online at Calgary Real Estate News. It talks about some of the things parents need to consider when they are making wills and want to keep a cottage in the family.

Check it out here:

http://www.cren.ca/content_view?MODE=VOL_ISSUE&VOL_ISSUE_ID=2746&PUB_DATE_DISPLAY=November+12%2C+2009&CONTENT_ID=4084