Cherished, memories, generational, and cozy, are just some of the words that evoke the magnificence that is the family cottage. It is this magnificence that leads many families to want to hold on to the family cottage as part of their estate plan. This is not always easy though, and the family cottage is often the centrerpiece of an estate dispute. As such, careful planning is key.
Those that want the cottage to stay in the family should consider a co-ownership agreement. The purpose of these types of agreements are to set out the governance of the cottage to ensure it is maintained and disputes are resolved.
Some of the key terms to consider in a co-ownership agreement include:
- how basic expenses will be covered, including hydro, telephone, maintenance, and property taxes;
- how extraordinary expenses, including capital expenses, are to be paid;
- when payments are to be made and to whom;
- which family members are allowed to occupy the cottage, and when;
- are guests permitted;
- should there be a management committee charged with making certain decisions;
- what mechanisms should be used to resolve disputes;
- the procedure for the sale or transfer by a co-owner; and
- what happens upon the death of a co-owner.
If the Kardashians can teach us anything about estate planning (and you know that given the title, there had to be a Kardashian reference), it is that family dynamics are in flux. New relationships emerge, siblings develop different values and beliefs, and sometimes, problems arise. A good co-ownership agreement is not cookie-cutter, but a carefully crafted document reflecting the uniqueness of each family member that can evolve over time.
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With the spring flowers beginning their bloom, and the warm weather slowly settling in, many Canadians turn their attention to summer plans at the cottage. With this in mind, I thought it would be apropos to consider estate planning and the family cottage.
How to best plan for the family cottage is a question I hear all of the time.
At the outset, according to this Globe and Mail article, it is important to consider whether you want to keep the family cottage in the family at all.
If the answer is yes, there are numerous estate planning vehicles available in order to transfer the cottage. As discussed in this prior Hull & Hull LLP blog, some options include making a specific bequest in a Will, where it can be left to certain beneficiaries who would receive the cottage absolutely and do with it as they please. Alternatively, should you wish to impose limitations on what the beneficiaries can (or cannot) do with the cottage, a testamentary or inter vivos trust may be more appropriate.
Of course, any decision should consider the tax implications. A prior Hull & Hull LLP podcast, found here, highlights the different options for dealing with capital gains tax in relation to the cottage.
Clearly, there are many options available and professional advice should be sought. Doing nothing is rarely a good idea. Look no further than the decision of Cowderoy v. Sorkos Estate, where a lengthy dispute ensued over whether the deceased had sufficiently transferred a farm and cottage.
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Last week, Globe and Mail columnist Tim Cestnick wrote on cottage ownership through a trust.
This week, Tim follows up his article with “Seven hints for holding a cottage in trust”.
The hints relate to:
1. Dealing with the tax hit upon the transfer to the trust.
2. The taxation of the taxable benefit of using the cottage.
3. The effect of the 21 year deemed distribution rule.
4. U.S. estate taxes.
5. The payment or avoidance of Land Transfer Taxes.
6. The payment or avoidance of HST.
7. Extra requirements in the event that the cottage needs to be mortgaged.
Both articles are worth a read by anyone considering ownership of a cottage through a trust. They highlight the benefits of such ownership, while also raising the myriad of issues and complications that can arise with such a vehicle. Clearly, good advice is needed by anyone considering the use of a trust for cottage ownership
Also, see our blogs and podcasts for more information relating to cottage ownership and succession. Also, just last week, our Ian Hull spoke on BNN about strategies to keep a cottage property in the family.
Clearly, this topic is as hot as our recent taste of summer weather.
Have a great weekend.
Paul E. Trudelle – Click here for more information on Paul Trudelle.
It’s Friday in late April. The May long weekend and all that cottage fuss is just around the corner. (I like the cottage, but understandably a lot of people choose the backyard.)
In Ontario, we do not have inheritance tax like they do elsewhere, including the United Kingdom. In some cases, the several-generation home has to be sold to cover a £14,000 tax bill or, in one instance, a painting donated in lieu of inheritance tax of £700,000.
To be certain, we have taxes here. At death, often there is a deemed disposition of property unless steps have been taken in advance. An article from last year provides some thoughts on how one might plan to avoid the situation where the capital gains tax cripples an estate or the next generation.
Apparently, and maybe not surprisingly, the cottage market may be down by about 20% this season. Good news for buyers. Maybe it is also good news for those who are looking at estate planning this year.
If the goal is to keep a cottage in the family, relative to the previous few years it might be an opportunity to trigger a disposition by transferring the property this season and, presumably, incurring a lower capital gain. Each situation requires specific tax advice.
The economy is lousy but it might be a chance to avoid financial strain and family tension for the next generation.
Have a safe weekend, wherever you spend it.
Listen to Dependant Relief.
This week on Hull on Estates, Natalia Angelini and Craig Vander Zee discuss dependant relief and reference a variety of cases that utilized the Succession Law Reform Act.
Listen to Delegation in Investment Accounts
This week on Hull on Estate and Succession Planning, Ian and Suzana discuss delegation issues that arise when dealing with Investment Accounts and address a listeners question about the family cottage.
Closing the Summer’s Cottage and Recreational Property Discussion – Hull on Estate and Succession Planning #79
Listen to "Closing the Summer’s Cottage and Recreational Property Discussion"
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.
Click "Continue Reading" for the transcribed version of this podcast.
Listen to "Drafting a Co-ownership Agreement"
Read the transcribed version of "Drafting a Co-Ownership Agreement"
This week on Hull on Estate and Succession Planning, Ian and Suzana discuss things to remember when drafting a co-ownership agreement of a recreational property with family or friends.
Click "Continue Reading" to read the transcribed version of this podcast.
Listen to "Arranging an Agreement on Cottage Property"
Read the transcribed version of "Arranging an Agreement on Cottage Property"
This week on Hull on Estate and Succession Planning, Ian and Suzana continue talking about cottage and recreational properties.
Listen to "Family Cottage Cases of Ownership Transfers"
Read the transcribed version of "Family Cottage Cases of Ownership Transfers"
In this week’s episode of Hull on Estate and Succession Planning, Ian and Suzana share a few stories involving cases of ownership and the family cottage.