Ownership structure matters.

At last! You’re finally ready to “seal-the-deal” on the family cottage you’ve dreamt about.  At this happy time, it’s not easy to consider the time when your ‘new’ cottage will form part of your legacy – but you should. 

When you die, unless you’re passing assets to your spouse, you’re deemed to have disposed of all your capital assets at fair market value.  If your cottage has appreciated in value, the resulting capital gains tax liability may force your heirs to sell the cottage. 

These are some of the ownership structure options you should consider to reduce the tax bite on your estate and your heirs:

Principal residence exemption
You are able to make a principal residence capital gains tax exemption claim on either your family’s city home or your vacation property.  If you choose to use your city home, the gain on your vacation property will be subject to tax.

Trusts
You can transfer ownership of your vacation property to a trust.  Future appreciation in the value of the property attributes to the trust capital beneficiaries, not to you.  This option allows you to maintain control of the property now and name an independent third party to manage the property on behalf of the beneficiaries after your death.  However, a trust may trigger an immediate capital gain and capital gains on property held in trust will also be triggered every 21 years, so this option requires careful consideration.

Transfer ownership now
Instead of leaving property to your children through your will, you can choose to transfer some or all of it to them during your lifetime – through the outright gift of the property with the option of retaining a life interest for yourself or by making one or more of your children joint owners.  Either of these options may also trigger an immediate capital gain but future capital gains on the property will accrue to your children and are not payable until they sell or transfer the property.

Buy-sell agreement
If one or more children wish to inherit the cottage but insufficient estate assets would remain (after the payment of estate debts and taxes) to provide for a fair and equitable distribution to the other children, then a buy-sell agreement between you and the children may be the solution.  Here, a legal agreement could provide the children who wish to acquire the cottage the right to purchase the cottage from your estate. Life insurance owned and paid for by those children on your life could then be used to fund the purchase of the cottage and pay any resulting tax implications of the estate.  Your estate would then have the dollars needed for an equitable distribution to all your children. One good way to cover capital gains tax liabilities and other estate debts is with permanent life insurance.  The death benefit is tax-free and can provide a ready source of cash that could prevent the forced sale of assets – including your cottage – to pay taxes.

It’s a good idea to discuss your cottage ownership and succession options with your tax, legal and financial advisors to ensure the choices you make co-ordinate with all the other aspects of your financial and estate plan.
For more information contact Kevin J. Zakus @ (250) 768-4546 or Email.

This column, written and published by Investors Group Financial Services Inc., is presented as a general source of information only and is not intended as a solicitation to buy or sell investments, nor is it intended to provide professional advice including, without limitation, investment, financial, legal, accounting or tax advice.