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This week on Hull on Estate and Succession Planning, Ian and Suzana continue talking about cottage and recreational properties.
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Arranging an Agreement on Cottage Property – Hull on Estate and Succession Planning Podcast #77
Posted on September 11th, 2007 by Hull & Hull LLP
Suzana Popovic-Montag: Hi, and welcome to Hull on Estate and Succession Planning. You are listening to Episode #77 of our podcast on Tuesday, September 11th, 2007.
Welcome to Hull on Estate and Succession Planning, a series of podcasts hosted by
Ian Hull and Suzana Popovic-Montag, that will provide information and insights into estate planning in Canada, from the offices of Hull Estate Mediation in Toronto, Ontario, Canada. Here are Ian and Suzana.
Ian Hull: Hello Suzana.
Suzana Popovic-Montag: Hi there Ian.
Ian Hull: Boy, it’s hot in the city these days. Very weird. We’ve just come out of the summer thinking it was going to go into the fall and a little cooler. And we had some weird weather last week but no complaints.
Suzana Popovic-Montag: And kids are all back to school, so it’s a great time of the year.
Ian Hull: That’s right, it couldn’t be busier. So it’s nice to sit back and take a deep breath, talk a little bit about some estate stuff, get recorded doing it. And on today’s podcast, I thought what we might do is just continue through our working theme of cottage property, recreational properties. I know on the last podcast we were focusing on at the end the fund for maintenance and repairs and improvements: (a) the importance of it and; (b) just some of the mechanics behind it. So, why don’t we just take that point and develop it a little further. Because this all ties into the agreement that works for everyone, and how you create the agreement that works for everyone. So what about the funds for maintenance and repairs and improvements?
Suzana Popovic-Montag: Well, Ian, just like any agreement or contract or arrangement, you want to make sure that the terms would set out how this fund is actually to be used, what for and maybe even consider listing specifically the certain types of maintenance and repairs that would be done out of the funds that are in this arrangement.
Ian Hull: That’s so important because you can sometimes get into a debate as to whether or not, say some part of the family comes up and they use the boats and kayaks and canoes and the other part of the family use it, the cottage, but they never touch the waterfront because they like playing baseball in the backyard or something. And then there’s a dispute as to, well who has to fix the boathouse when it starts to fall apart? So identifying that can be a really helpful tool.
Suzana Popovic-Montag: And you could also set out, I think in these kinds of arrangements, how different co-owners or the people that you have made or named beneficiaries of the cottage, could vote or agree or consent to certain major repairs or improvements being made.
Ian Hull: That’s a good idea because even if you try to document and list as best as you can, you’re going to miss something. You’re either going to miss a category or an event. And so then what you’re saying is you just throw in a mechanism that allows the group to decide beyond that.
Suzana Popovic-Montag: The terms, I think, would also have to address the fact that, you know, the reality that perhaps the fund that’s set up or the agreement that’s made, may not last forever. It may not be sufficient. And, you know, in those circumstances, you might want to consider what happens then.
Ian Hull: Absolutely, because then really what you have to do is set in a mechanism to start taxing the group of owners, in a sense, to keep the fund going. These maintenance funds for property are hard enough to set up, but it’s also hard enough to find the money at the front end to do it, especially when you don’t even know what to predict. If it’s going to be worth $2,000 a year in repairs, or is it going to be $20,000?
Suzana Popovic-Montag: That’s right.
Ian Hull: So one of the things that, you know, we have seen our clients do is literally create a formula that develops over the lifetime of the agreement, knowing that expenses will go up and knowing that they often, at the outset, the initial expenses can be heavy because maybe once you take the cottage over, or you buy the cottage from your parents, or whatever, you have to do the kitchen because the parents have not done anything with it for 30 years or something. So there may be some up front expenses that you can agree on. And then you’d want to just create this funding mechanism by saying every year, x% is going to come in from the fund from your own sourcing.
Suzana Popovic-Montag: And I think as a concept, that makes a lot of sense, and that’s why, you know, we can all agree up front that these kinds of things are necessary, we should be anticipating them. But unless you’ve actually, you know, put it pen to paper and somehow encapsulated that agreement, it just will open up the possibility for disagreements at the end of the day, I think.
Ian Hull: So, speaking of disagreements, how do we…we’ve said we’ve got the thing identified, we’ve got hopefully the categories. And if we’ve missed a category, we’ve got a mechanism to revisit the expense and how it’s going to be paid. What about the decision-making process though? Like, what sort of tricks and tips can we add to the agreement to help with that?
Suzana Popovic-Montag: Well I think, Ian, the terms should specifically set out how it is that these decisions are going to be made for the property. And if you’ve got a trust arrangement, for instance, it might be the trustees who are making all of the decisions. And if you’ve got more than one trustee, you have to decide if they can act either unanimously or just by majority. Those kinds of mechanisms where people can suddenly have a definitive answer being made by an identified group of people.
Ian Hull: And, you know, we can sometimes work outside the box a little bit and think about how you want to create this decision-making chain or process. And the terms of the trust can also provide that for certain matters, the consent of certain groups of beneficiaries, for example, possibly adult beneficiaries with a direct interest in the property, would have to be required. And so you have to…you’re forced to go to those who are directly going to benefit or it’s directly going to cost them, to get their consent before you can go put a new second floor on the cottage or something.
Suzana Popovic-Montag: And if you’re in a situation where you’ve got maybe a co-ownership agreement, then maybe that agreement itself can say that, you know, perhaps a majority of the owners are the ones that make the decisions.
Ian Hull: And that co-ownership agreement is, I think, one of the most important…it’s like the shareholders’ agreement in a good corporate situation. They are just such vital documents and if they’re done right, they are so effective.
Suzana Popovic-Montag: And I think in those cases, you know, you want to make sure that major decisions and things like, for instance, ultimately deciding to sell the property or an interest in the property, in that kind of situation you may want more than just a majority or you might want actually unanimous approval by all the owners, because it is such an important decision.
Ian Hull: And there’s also this twist that with these co-ownership agreements, and sometimes this idea is missed, is that you want to set out who will specifically act on behalf of minors who have an interest in the property. You’re almost what we call appointing a litigation guardian, so to speak. But you’re trying to anticipate that everyone who has a financial interest in the process is at least at the table and who are the representatives at the table. There’s some legal consequences of just randomly picking someone, putting it in an agreement. So we don’t want to worry about getting into the mechanics of that too much, but I just think that they have to dovetail that out too, and think about the minor children’s interests and how you’re going to deal with it on this. And again, we’re talking about major moves, like the sale of the property and the like.
Suzana Popovic-Montag: I think the agreement as well should speak, at least to some extent, about the assignment of responsibilities.
Ian Hull: That’s a great idea because the terms of the trust or the co-ownership agreement, if they set out who is responsible for dealing with the routine matters such as paying the bills and that, it can actually bring a lot of peace, because we all know in our own lives that, you know, typically in a situation where there’s a busy family, someone has to pick up the bills and someone has to deal with that issue. And if you don’t identify who’s got the sort of core things, if the pump breaks, who’s going to be looking after it, who’s going to take over, who’s got the connection to the handyman or however. And you might want to set those responsibilities right out in the agreement.
Suzana Popovic-Montag: And if you’ve got a trust, then usually it would be the trustees I think who would be the ones who are, you know, given the responsibility to do these things. And in perhaps a co-ownership agreement, it might be a particular owner who’s going to be given the responsibility for, as you say, paying bills or doing whatever is necessary to maintain that property.
Ian Hull: And when you’ve got a co-ownership agreement, as opposed to a trust, you can even, you know, take the load off the shoulders of the one family every year and, for example, set up rotating responsibilities for one of the co-owners from one year to the next, or maybe for a five year period. It is difficult, because sometimes you have to develop personal relationships with the people that are going to help fix the place or deal with you or your neighbours and so on. But sometimes people get angry about the fact that they’re doing all the work and so what you do is you agree to rotate the job.
Suzana Popovic-Montag: And I think specifically, you know, given that this is usually a recreational property, the fact that, you know, somebody is viewing themselves as having to do more than others to enjoy the property, could lead to that tension. So actually building in some kind of mechanism, or at least turning your mind to the possibility, is a great idea.
Ian Hull: Okay, well I think there’s some more ideas that we have on the whole, well the terms of the trust or the terms of the co-ownership agreement, we can talk maybe about in our next podcast, about scheduling the use of the property, talk about the consequences of defaults should they occur, and some of the other ramifications that you may want to consider in the context of a co-ownership agreement. So why don’t we save that for our next podcast and thanks very much, Suzana.
Suzana Popovic-Montag: Thanks to you, Ian.
You’ve been listening to Hull on Estate and Succession Planning with Ian Hull and Suzana Popovic-Montag. The podcast you have been listening to has been provided as an information service. It is a summary of current legal issues in estates and estate planning. It is not legal advice and you are reminded to always talk with a legal professional regarding your specific circumstances.
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