Silver and Gold Magazine Fall 2016 - Page 28

silvergoldmagazine.ca MONEY MATTERS PASSING ON THE COTTAGE – By Christine Van Cauwenberghe When passing the family cottage onto their children, the big question is, “Where do I start?” First, determine when you think you might want to pass on the property. If you intend to use your vacation home throughout your retirement, it’s best to wait until your spouse passes away before transferring the property. Unfortunately, many rush into passing on their property, hastily adding their children as joint owners without considering critical scenarios such as: • What if a child gets separated or divorced from their spouse? • What if a child goes bankrupt? • What if you wanted to sell or mortgage the property and one of the new joint owners refused to consent? Generally, it is not advisable to add additional owners into the title. Although some families decide to add a joint owner to avoid paying probate fees, these fees are actually quite low (approximately 1.5% in Ontario) and generally not worth the risk of losing control of the property. If you adamantly want to add a child as a joint owner, contact an estate lawyer who can structure a deal that makes the new “owner” a trustee of the property. This will ensure that the property continues to be “beneficially” owned by the parents until the time of their death and distributed as part of their estate. Assuming you want to wait to transfer your property at Léony deGraaf Hastings, CFP, EPC Certified Financial Planner Retirement & Estate Specialist A Senior’s Advisor Who Cares THANKS FOR VOTING BURLINGTON - SINCE 2009! New Estate Rules means it’s time to Review your Estate Expectations Call Today for Your Complimentary Review 905-632 632-9900 www.dgfs.ca the time of your death, sit down with your children and see who might be interested in taking over responsibility for the vacation home, including who may use it and when, how much will be contributed on an annual basis for repairs, and what sort of major renovations should be done, so try to avoid that route. In a best case scenario, only one child will be interested in keeping the property. But if some of your children want to co-own the family cottage, they should first negotiate a co-ownership usage agreement, which outlines what will happen when one owner dies or gets divorced, and how to resolve disagreements about usage and maintenance among other things. The next question will then be, how to pay for it. In most cases, the child will buy the property by using their inheritance proceeds. But what if their inheritance is worth less than the value of the cottage? For example, what if your combined estate, including your home, cottage and investments is worth $2 million, with the cottage being worth $600,000? After capital gains taxes and other expected tax on your registered retirement savings plan or investment funds, the after-tax value of your estate could be reduced to $1.5 million. If you have three children, this means they will each receive $500,000. If one of them wants to inherit the $600,000 cottage, that child will have to come up with $100,000 more to buy their siblings out. If the gap is too significant for the child to manage, you may need insurance to cover the amount. The sooner you plan, the lower the insurance cost. If none of your children are interested in taking over the cottage, then you only need to decide when to sell it. One option may be to designate the property as your principal residence for the principal residence exemption, but you won’t be able to do that until your property is sold. Whatever the situation, your executor should work with a tax advisor to ensure that your estate won’t pay unnecessary taxes. Keep in mind that the capital gains tax is completely separate from probate fees. Do not assume that adding a child as a joint owner will help avoid capital gains tax.• Christine is a tax and estate lawyer for Investors Group Financial Services Inc. She specializes in structuring estate plans in the most tax-effective and practical manner. 28 More articles, recipes & events online: www.silvergoldmagazine.ca silvergoldmagazine.ca MONEY MATTERS PASSING ON THE COTTAGE – By Christine Van Cauwenberghe When passing the family cottage onto their children, the the time of your death, sit down with your children and see big question is, “Where do I start?” First, determine when you think you might want to pass on the property. If you intend to use your vacation home throughout your retirement, it’s best to wait until your spouse passes away before transferring the property. Unfortunately, many rush into passing on their property, hastily adding their children as joint owners without considering critical scenarios such as: • What if a child gets separated or divorced from their spouse? • What if a child goes bankrupt? • What if you wanted to sell or mortgage the property and one of the new joint owners refused to consent? Generally, it is not advisable to add additional owners into the title. Although some families decide to add a joint owner to avoid paying probate fees, these fees are actually quite low (approximately 1.5% in Ontario) and generally not worth the risk of losing control of the property. If you adamantly want to add a child as a joint owner, contact an estate lawyer who can structure a deal that makes the new “owner” a trustee of the property. This will ensure that the property continues to be “beneficially” owned by the parents until the time of their death and distributed as part of their estate. Assuming you want to wait to transfer your property at A Senior’s Advisor Who Cares Léony deGraaf Hastings, CFP, EPC Certified Financial Planner Retirement & Estate Specialist THANKS FOR VOTING BURLINGTON SINCE 2009! New Estate Rules means it’s time to Review your Estate Expectations Call Today for Your Complimentary Review 905 905--632 632--9900 28 www.dgfs.ca who might be interested in taking over responsibility for the vacation home, including who may use it and when, how much will be contributed on an annual basis for repairs, and what sort of major renovations should be done, so try to avoid that route. In a best case scenario, only one child will be interested in keeping the property. But if some of your children want to co-own the family cottage, they should first negotiate a co-ownership usage agreement, which outlines what will happen when one owner dies or gets divorced, and how to resolve disagreements about usage and maintenance among other things. The next question will then be, how to pay for it. In most cases, the child will buy the property by using their inheritance proceeds. But what if their inheritance is worth less than the value of the cottage? For example, what if your combined estate, including your home, cottage and investments is worth $2 million, with the cottage being worth $600,000? After capital gains taxes and other expected tax on your registered retirement savings plan or investment funds, the after-tax value of your estate could be reduced to $1.5 million. If you have three children, this means they will each receive $500,000. If one of them wants to inherit the $600,000 cottage, that child will have to come up with $100,000 more to buy their siblings out. If the gap is too significant for the child to manage, you may need insurance to cover the amount. The sooner you plan, the lower the insurance cost. If none of your children are interested in taki ݙ\BYK[[HۛHYYXYH[[] ۙB[ۈX^HH\Yۘ]HH\H\[\[\[\Y[H܈H[\[\Y[H^[\[ۋ][H۸&]HXH][[[\\H\ ]]\B]X][ۋ[\^X]܈[ܚ]H^Y\܈™[\H][\\]H۸&]^H[X\\H^\ˈY\[Z[]H\][Z[^\\][H\\]HBؘ]HY\ˈ\[YH]Y[H[\H[ۙ\[[]Y\][Z[^ (\[H\H^[\]H]Y\܈[\ܜܛ\[[X[\X\[ˈHXX[^\[X\[\]H[[H[^ YYX]H[XX[X[\[ܙH\X\X\\ ][ۛ[N˜[\XY^[KB