To maintain those good memories of your family cottage, make sure you tie up all the loose ends and have an estate plan for when you pass it along to your surviving family members. Register file photo

Vacation properties bring their own set of issues

By  Rosanne Rocchi, Catholic Register Special
  • November 1, 2014

One of the most challenging issues in estate planning is how to handle the disposition of a vacation property. The challenge is how to dispose of such property either during life or at death. For those with a small family or perhaps a single child, the decision is not challenging. For those with multiple children, the decision on whether to retain family vacation properties or share them among members of the family can be difficult. 

The family cottage is often a beloved facility and many people have fond childhood memories of summers at the cottage. The family cottage provides a welcome respite from work and, if close enough to where they reside, children and their families will spend weekends or sometimes the entire summer there. While parents are alive and maintaining the cottage, it is also an economical vacation for adult children. 

On the other hand, some children have less fond memories of cottages. As well, they may have moved away from the area and rarely use the family vacation property. For them, the cottage represents a significant amount of capital that is tied up. 

Who gets the cottage? 

The first question is whether any of the children want to inherit the family cottage or partial interest in it. Estate planners are all familiar with people who spend much time deciding how to share the family cottage without first discussing the matter with their children to understand their wishes. Issues to be taken into account include: 

• The travelling time between each child’s residence and the cottage; 

• Each child’s financial circumstances; 

• The dynamics between the siblings and their families; 

• Whether or not the property is large enough to permit expansion or building of another cottage; 

• Whether or not any of the children is able to buy out the interests of the others. 

When to make a plan 

People should prepare a will as if they were going to die tomorrow. So, a 50-year-old couple may face the challenge of having a 25-year-old child whose financial circumstances and future are evident and a 15-year-old child whose future is largely unknown. In that circumstance, the couple may decide that the cottage should be held in trust for a period of perhaps 10 years after they both have died. After 10 years the children can decide if the cottage should be sold, shared or purchased by either of them. By that time the youngest child may have had completed their education and perhaps embarked on a career. However, at 25 they may still lack the capital to buy out the interest in the cottage, so the will could provide a five-year purchasing timeframe. 

Co-Ownership Agreements 

If there is no clear choice as to which child wants the cottage and a circumstance where all the children want it, the cottage can be transferred to them as co-owners, either with or without a co-owner agreement. This type of agreement is essential to prevent conflict. It should contain rules related to the payment of expenses, scheduled use of the property, consequences of the death of a child as well as a mechanism for dispute resolution. In some cases, a buyout or equalization provision should also be included. There may also be additional provisions relative to the specific needs and desires of each family. 

It is also important to consider children’s spouses and issues such as second marriages and stepchildren. Family law implications are also important when transferring the property to a child. In Ontario, the Family Law Act excludes assets that were inherited by gift after the date of marriage. However, where property is used as a matrimonial home it is likely not protected unless couples have entered into a marriage contract and agreed the family cottage is not designated as a matrimonial home. The co-owner agreement would also prohibit a child from holding his or her interest jointly with a spouse. 

Tax considerations 

There are tax matters to consider. Let’s assume a husband and wife own a cottage jointly. They also have a city residence. They can designate one property as a principal residence for income tax purposes. (Only one principal residence per family can be designated.) Depending on the increase in value of the cottage property versus the city property, they may decide to designate the cottage as the principal residence. 

When an individual dies, he or she is deemed to have disposed of all capital property at fair market value and to have reacquired it immediately prior to his or her death at that fair market value. This triggers capital gains tax on death. There is a special exemption for property transferred to a surviving spouse so that no taxes are payable until after the death of the last to die or on a sale, whichever first occurs. But after the death of the last to die, there could be large amounts of tax to pay if the property has appreciated in value. 

As a result, a couple will need to determine whether or not their estates will have sufficient liquidity to pay taxes and provide enough capital for the survivor without having to sell the cottage in order to pay those taxes. 

Multiple wills – probate 

In Ontario, estate administration tax (also known as probate tax) is payable on the death of a person. This tax is based on the value of the estate that flows through a will. Assets that do not One of the most challenging issues in estate planning is how to handle the disposition of a vacation property. The challenge is how to dispose of such property either during life or at death. For those with a small family or perhaps a single child, the decision is not challenging. For those with multiple children, the decision on whether to retain family vacation properties or share them among members of the family can be difficult. 

The family cottage is often a beloved facility and many people have fond childhood memories of summers at the cottage. The family cottage provides a welcome respite from work and, if close enough to where they reside, children and their families will spend weekends or sometimes the entire summer there. While parents are alive and maintaining the cottage, it is also an economical vacation for adult children. 

On the other hand, some children have less fond memories of cottages. As well, they may have moved away from the area and rarely use the family vacation property. For them, the cottage represents a significant amount of capital that is tied up. 

Who gets the cottage? 

The first question is whether any of the children want to inherit the family cottage or partial interest in it. Estate planners are all familiar with people who spend much time deciding how to share the family cottage without first discussing the matter with their children to understand their wishes. Issues to be taken into account include: 

• The travelling time between each child’s residence and the cottage; 

• Each child’s financial circumstances; 

• The dynamics between the siblings and their families; 

• Whether or not the property is large enough to permit expansion or building of another cottage; 

• Whether or not any of the children is able to buy out the interests of the others. 

When to make a plan 

People should prepare a will as if they were going to die tomorrow. So, a 50-year-old couple may face the challenge of having a 25-year-old child whose financial circumstances and future are evident and a 15-year-old child whose future is largely unknown. In that circumstance, the couple may decide that the cottage should be held in trust for a period of perhaps 10 years after they both have died. After 10 years the children can decide if the cottage should be sold, shared or purchased by either of them. By that time the youngest child may have had completed their education and perhaps embarked on a career. However, at 25 they may still lack the capital to buy out the interest in the cottage, so the will could provide a five-year purchasing timeframe. 

Co-Ownership Agreements 

If there is no clear choice as to which child wants the cottage and a circumstance where all the children want it, the cottage can be transferred to them as co-owners, either with or without a co-owner agreement. This type of agreement is essential to prevent conflict. It should contain rules related to the payment of expenses, scheduled use of the property, consequences of the death of a child as well as a mechanism for dispute resolution. In some cases, a buyout or equalization provision should also be included. There may also be additional provisions relative to the specific needs and desires of each family. 

It is also important to consider children’s spouses and issues such as second marriages and stepchildren. Family law implications are also important when transferring the property to a child. In Ontario, the Family Law Act excludes assets that were inherited by gift after the date of marriage. However, where property is used as a matrimonial home it is likely not protected unless couples have entered into a marriage contract and agreed the family cottage is not designated as a matrimonial home. The co-owner agreement would also prohibit a child from holding his or her interest jointly with a spouse. 

Tax considerations 

There are tax matters to consider. Let’s assume a husband and wife own a cottage jointly. They also have a city residence. They can designate one property as a principal residence for income tax purposes. (Only one principal residence per family can be designated.) Depending on the increase in value of the cottage property versus the city property, they may decide to designate the cottage as the principal residence. 

When an individual dies, he or she is deemed to have disposed of all capital property at fair market value and to have reacquired it immediately prior to his or her death at that fair market value. This triggers capital gains tax on death. There is a special exemption for property transferred to a surviving spouse so that no taxes are payable until after the death of the last to die or on a sale, whichever first occurs. But after the death of the last to die, there could be large amounts of tax to pay if the property has appreciated in value. 

As a result, a couple will need to determine whether or not their estates will have sufficient liquidity to pay taxes and provide enough capital for the survivor without having to sell the cottage in order to pay those taxes. 

Multiple wills – probate 

In Ontario, estate administration tax (also known as probate tax) is payable on the death of a person. This tax is based on the value of the estate that flows through a will. Assets that do not devolve through a will are exempt from probate tax, which could include jointly held property, life insurance proceeds, RRSP proceeds, pension benefits and property held in trust. 

Because estate administration tax can be considerable, many individuals use two wills. The General Will is the one submitted to probate. The second will, often called the Special Will, is used to dispose of assets exempt from probate. Subject to certain very limited exceptions, real estate transfers require probate of the will. So the cottage property will generally devolve through the General Will and be submitted to probate. 

Some advisers suggest transferring the cottage to a family trust under which the husband and wife can use the cottage for as long as they live and, on their death, to retain the cottage in the family trust with each child and his or her family having a right as a beneficiary under the trust to use the property in accordance with specified terms. However, there are many problems with this approach, including several tax-related issues. 

Foreign properties 

Increasingly, people are purchasing properties abroad. While this may seem appealing, the cost is often considerable. It is critical to have advice from a lawyer regarding practices in that jurisdiction regarding how to hold title to the property (e.g. joint tenancy, single purpose holding corporation, trust) and how to dispose of the property on death. As well, there are estate taxes, death duties and gift taxes at the federal and state level. Advice in each jurisdiction is required at every step of the process, including any decisions to transfer property, either during one’s life or on death. Finally, individuals who spend a significant amount of time in another jurisdiction should consider having a Power of Attorney for Property and a Power of Attorney for Personal Care governed by the jurisdiction in which the vacation property is situated. 

The manner and formalities of making a will and its essential validity and effect are governed by the law where the land is situated. In the United States, each state is a separate foreign jurisdiction. Therefore, if you own a condominium on a golf course in Arizona, a ski property in Aspen and a beach property in Florida, there will be three different foreign jurisdictions with separate rules regarding wills and probate. 

A separate will for U.S. property 

If you dispose of property under an Ontario will (or under any other Canadian will as each province has separate rules relating to wills), a U.S. state may not recognize the authority of an Ontario appointed executor or an Ontario grant of an appointment of estate trustee. If you only have a Canadian will, it will be necessary to obtain “re-sealing” in the jurisdiction where the property is located. As well, it may be necessary to post a bond if the executor appointed under your Canadian will is not resident in the jurisdiction in which your vacation property is situated. 

Multiple wills are an important and useful strategy when planning for property owned in a foreign jurisdiction. As well, there are other advantages of having a foreign will. Procuring advice from a lawyer in each jurisdiction is essential. 

Foreign debts and taxes 

Various jurisdictions impose different taxes on the transfer of properties and on death. For example, the United States imposes an estate tax while other jurisdictions do not. The taxation regime of each jurisdiction is essential to consider in determining an effective succession plan. Further, property owners should consider tax treaties or potential for double taxation, as well as the relevant reporting requirements for property ownership in different jurisdictions. 

What do most people do? 

Estate planners are often asked “what do most people do?” But when it comes to vacation properties, there is no one-size-fits-all solution for the family cottage or other vacation properties. As a general rule, the more valuable they become, the less likely it is that they can remain in the family. Vacation properties should be enjoyed while they can. After that, the most common decision may well be to sell the property. 

(Rocchi is a partner at Miller Thomson in the law firm’s Estate Planning, Trusts and Succession Law Group and Pension Group )

Comments (0)

There are no comments posted here yet

Leave your comments

  1. Posting comment as a guest. Sign up or login to your account.
Attachments (0 / 3)
Share Your Location
Type the text presented in the image below

Support The Catholic Register

Unlike many other news websites, The Catholic Register has never charged readers for access to the news and information on our site. We want to keep our award-winning journalism as widely available as possible. But we need your help.

For more than 125 years, The Register has been a trusted source of faith based journalism. By making even a small donation you help ensure our future as an important voice in the Catholic Church. If you support the mission of Catholic journalism, please donate today. Thank you.