Closing the Summer’s Cottage and Recreational Property Discussion – Hull on Estate and Succession Planning #79
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In this week’s episode of Hull on Estate and Succession Planning, Ian and Suzana consider the other factors to consider in the succession agreement.
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Closing the Summer’s Cottage and Recreational Property Discussion – Hull on Estate and Succession Planning Podcast #79
Posted on September 25th, 2007 by Hull & Hull LLP
Suzana Popovic-Montag: Hi, and welcome to Hull on Estate and Succession Planning. You are listening to Episode #79 of our podcast on Tuesday, September 25th, 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: Hi Suzana.
Suzana Popovic-Montag: Hi there, Ian. How are you?
Ian Hull: I’m okay. A little frustrated. I take this as our third take of this podcast, so this will be our best ever.
Suzana Popovic-Montag: And to those of you who don’t know Ian Hull, there is no such thing as a second take, let alone a third.
Ian Hull: Well, we get it right the first time, typically, but the technology is killing me. Anyway, no one wants to hear about our technology problems. We want to talk about cottage and recreational property problems some more. And I think we really are truly at our last of our mini-series, as I described it in one of our takes. It is not the equivalent of “Roots” but it’s still a mini-series, nonetheless.
Suzana Popovic-Montag: And I think quite appropriately timed as well, given that we’ve just celebrated the last weekend of the summer.
Ian Hull: So we’re looking at this cottage property, or recreational property conundrum. And we’ve talked a little bit about what’s in the agreement. So why don’t we spend the last podcast on this topic where we’re really flushing out the details of it, on some other factors to consider in the context of this agreement, whether it’s in the form of a trust or it’s in the form of a contract or a co-ownership agreement.
Suzana Popovic-Montag: Well, Ian, I think if we look at what happens in the circumstances when there’s the death of either a co-owner or a beneficiary, we can see that there are many ways that a trust or a co-ownership agreement can actually deal with these kinds of situations.
Ian Hull: So in the case of a trust, the terms themselves could set out that the beneficiary’s interest in this vacation property falls into his or her estate. Or it could provide that certain other beneficiaries would receive it within a class or of that nature.
Suzana Popovic-Montag: In the case of a co-ownership agreement, each owner might actually be free to dispose of his or her interest in the property by way of his or her Will.
Ian Hull: And that co-ownership agreement could also give the other co-owners the option to purchase the deceased’s owner’s interest from his or her estate.
Suzana Popovic-Montag: Or alternatively, the agreement could actually require the other co-owners to purchase the interest of the deceased owner.
Ian Hull: So again, there are many alternatives. And we just want to pause for a moment before we go into the other considerations that we want to talk about today. And I am reminded of the fact that what we’ve been trying to talk about in dealing with this cottage property issue is options that are available. And the trust agreement brings with it its own unique protections and flexibilities and so does the co-ownership agreement. And I think this last illustration is one where you can see the real delineation between the two choices. Because the death of a co-owner is easier to essentially organize in some ways than it is of a beneficiary in a trust arrangement.
For example, with a co-ownership agreement, you could identify a mechanism. When the co-owner dies, this will happen. And you could expand that to say that when the co-owner dies, it will be going to some third party, maybe their share has to go to the Humane Society, or something like that. Whereas in a trust, it’s a little more complicated and it’s a little more awkward to direct where the ownership interest will go on death, if you want to go thinking outside of the box.
And the co-ownership agreement, as I say, might in the right circumstances create some better flexibilities. But a trust is also wonderful in its own way because it creates some real certainty. So for example, if there are three children that own the cottage and on the death of one of the children, the trust provides that the child who dies interest passes to his or her own children. So for example, in this case, to the grandkids, that one-third interest passes to the grandkids, it’s essentially entrenched in a trust arrangement which is very difficult to amend or vary in a future step. So it really is, like that example is something that you’ve got Court protections to make sure that that gifting will fall in that way. Whereas with the co-ownership agreement, you’ve really only got contractual protections. And that really, I think, underscores the big difference between what we’re talking about in a co-ownership agreement and in a trust agreement. And that is, is that the scrutiny of the Court is almost, well it’s overwhelming in the context of a trust arrangement. And it is less overwhelming, if I can put it that way, in the context of a co-ownership agreement. So whether you have flexibility or not, at the end of the day, you have to either decide that you want to be subject to the scrutiny of the Courts or not. And that is almost one of the preliminary questions you want to ask yourself and answer before you enter into either option.
Suzana Popovic-Montag: That’s a very important point, Ian. A good illustration of the distinction between the two arrangements that, you know, we’ve been talking about in terms of how to hold a cottage property. And it also, I think, in each situation, you can also deal with what happens in the event that one of the owners or beneficiaries becomes incapacitated.
Ian Hull: So the terms of the trust in the situation of incapacity, the terms of the trust or the co-ownership agreement, should outline what would happen if one of the beneficiaries or, in the case of a co-ownership agreement one of the co-owners, becomes incapacitated either physically or mentally, to the point where they cannot use the property.
Suzana Popovic-Montag: And I think the nature of the incapacity is also very important. Because if it’s a physical incapacity, for instance, and the property is one that would have required a lot of maintenance or a lot of work to be done on it, then that physical incapacity is going to mean something different in that circumstance.
Ian Hull: That’s such a good point because the limitations we usually think about are on the element of the mental capacity. If you lose mental capacity, maybe that would affect your ability to use it. But physical demands of a recreational property can be a unique circumstance to consider. So the physical incapacity is front and centre.
Suzana Popovic-Montag: And in the case of a co-ownership agreement, the other co-owners might be required in that circumstance, if there’s an incapacity of some nature, to purchase the interest of the incapacitated owner at the option of that owner or his or her personal representative, if someone is already acting for that person.
Ian Hull: Another thorny issue is to consider the whole mechanism to deal with the sale of the interest, as you’ve just pointed out, that option is given.
Suzana Popovic-Montag: And I think it’s safe to say that it’s probably easier to include terms that address beneficiaries or co-owners who want to sell their interests in a co-ownership agreement rather than in a trust arrangement.
Ian Hull: So while it’s not necessarily common for trusts to allow beneficiaries to sell their interests in the trust to a third party, in fact it’s uncommon, the terms of a co-ownership agreement alternatively though can easily give that owner that right. And that’s an illustration of what I was talking about earlier in the sense of the extra flexibility that comes from the contractual arrangement that isn’t as closely scrutinized by the Court as the trust arrangement.
Suzana Popovic-Montag: And the agreement could also give the other co-owners a right of first refusal, or even the option to purchase the interests of a co-owner at fair market value, as maybe some other alternatives.
Ian Hull: Okay, let’s talk a little bit about situations where you’re forced to dispose or some bankruptcy or financial problems, those kind of scenarios and how that might be dovetailed into an agreement.
Suzana Popovic-Montag: I think that you should probably try to anticipate or at least think about these situations arising in the future and try to include some terms to deal with the specific scenarios where the interest of a beneficiary or owner is actually seized or disposed of involuntarily.
Ian Hull: So we want to keep an eye on the ball a bit here, because for example, the creditor of an owner or beneficiary in the trust situation, might try to claim an interest. Or there might be some sort of family law claim by a spouse that may be not as welcome as he or she might have been in the family.
Suzana Popovic-Montag: And given those realities, you could choose to include a term that would permit the other owners or perhaps the trustees or even the other beneficiaries, to purchase the interest of that creditor or other outsider who’s attempting to actually seize or acquire the cottage property.
Ian Hull: So finally and not necessarily most important, but a really, really important clause that we like to see in these agreements, is a dispute mechanism, an alternative dispute mechanism formula that’s set up in the contract itself. And in some situations, it’s set up in the trust arrangements.
Suzana Popovic-Montag: And the reason you want to do that is because when you’re drafting either the trust or the co-ownership agreement, you try certainly to anticipate as many of the possibilities and the circumstances that can arise but there might be something that got missed or something that couldn’t have been anticipated at the time. And if you need to then try to change or to alter the arrangement, you would need a facility or mechanism by which you could do that. And as you suggested, an alternative dispute resolution mechanism is the best and probably the most cost-effective way to try to do that.
Ian Hull: And one of the things that I put right in those dispute mechanisms is to force the families first and foremost, force them to talk. And you say that any one of the co-owners, and it’s the trust situation, one of the beneficiaries, can trigger what we’ll call is a family meeting of that nature, doesn’t have to be in person, maybe you can do it by phone or video, to see if you can hash it out. And even at that first meeting, you may well want to have a facilitator involved so that not necessarily to mediate but to make sure that you move along on the issues that are bothering the parties. But that alternative mechanism is important.
Finally the last thing I just wanted to say is that we’ve had a busy week last week in our own professional practices. I spoke to a group of financial planners on Monday about trusts and litigation relating to trusts and some of the topics that we talked about have been raised in our recent podcasts and certainly over the years in Hull on Estates as well. The other thing that Suzana I know you and I are co-lecturing on is the Windsor Estate Planning Council that we went down to, to speak to financial planners, lawyers, and accountants on the family meeting and the family office, which was a great success and a lot of fun. And then I’ve got an Ontario Bar Association, I just spoke at was dealing with the whole question of recent developments of the Operation Update seminar that was held last Friday.
So we’ve been busy and those are all good avenues to consider, other different sources of continuing legal education, I highly commend you to.
Suzana Popovic-Montag: Well thanks very much, Ian, and I look forward to our next podcast.
Ian Hull: Thanks very much.
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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