Smooth Transition: Keeping Your Cottage in the Family
Family cottages can play an integral role in strengthening
family bonds. Over time, traditions are established, festivities
are enjoyed and emotional ties are formed, creating a desire to
keep these properties in the family for generations. However, a
variety of financial and legal concerns can make this more
difficult than it sounds.
Transfer Taxes and Ownership Costs
Many people are unaware that parents can't simply transfer a
cottage to their kids tax-free. Though a transfer between spouses
is tax-free, any time you transfer cottage property to your
children it's a taxable sale.
And, once a cottage has been transferred over, new owners may
not be prepared for the cost of maintaining a second home,
particularly if they have competing financial obligations. If one
child is better off than a sibling, they may prefer to pay down the
mortgage of their primary residence, contribute to retirement funds
or save for their children's education. Some children may be
able to afford renovations, while others may not.
With that in mind, cottage owners should seriously consider the
possibility that their property may not pass on to the next
Even in cases where one or more children are able to take full
responsibility for the ownership of a cottage, there are other
financial repercussions to consider. Children's spouses will
legally own half the cottage, so in the event of a divorce they are
entitled to half the assets of the property. Unless there is a
marriage contract in place or some other strategy, that spouse can
force the sale of the cottage or require their ex-partner to buy
them out. This is a real trap people are often unaware of.
While a marriage contract is one way around this problem, it can
be an awkward process for the couple in question. Another option is
to transfer the property and have the parents require a promissory
note for the fair market value of the cottage. Both the child and
the spouse sign a promissory note, which will protect the
child's interest in the value of the property at the date of
transfer. This may allow the cottage to stay in family hands if
there is a marriage breakdown.
Transfer Alternatives: Family Trusts
It is worth noting that transferring a cottage directly to
children is not your only option. If keeping the cottage in your
family for several generations is your primary objective, forming a
family trust may be a preferable option. This qualifies as a
disposition, so it's necessary to pay tax at the time of the
transfer, but it protects you from several other risks. If this is
a new cottage or one without a large capital gain, it will be
easier to use the family trust. By having the cottage in a trust,
the property is more protected from marital breakdowns because it
doesn't belong to the children. The beneficiaries of the trust
can even be grandchildren, so you can pass on the property for
generations to come.
Of course, family trusts are not without their disadvantages.
They are costly, can be complicated to draw up, require a trust
deed, and the aid of lawyer. But if you own a high-value cottage
that you would like to keep in the family for the long haul, it
could be your best bet.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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On March 31, 2014, BC's new Wills, Estates and Succession Act1 ("WESA") will come into force. WESA introduces new protections for beneficiaries of estates that are in danger of being disputed or deemed ineffective by a court.
It is not uncommon for parents to provide monetary gifts to their adult children. Parents may wish to help their child with a down payment on a property, or help pay out their child's existing mortgage.
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