Clark Wealth Management Group - ScotiaMcLeod Fredericton

Summer is here and many of us will be leaving work to enjoy our favorite "home away from home" our family cottage. From a tax perspective there is an important difference between your cottage and your primary residence! On the last death of you and your spouse there will likely be a significant capital gains tax liability because of an increase in the value during the time you owned it.
Although tax is a consideration, for most families the question of who to leave the property to is the biggest issue. It may not be best to leave it equally to all children. You should have an open discussion with children or grandchildren to determine who has an interest in using the property, in paying capital gains tax and the costs of future upkeep.
Life insurance can be a cost-effective method of providing liquid cash to pay tax on any capital gains when the last owner dies. In most cases like these the insurance would be a "joint last to die" policy and because two people are insured, the cost will be less than either could buy individually. The proceeds of the insurance are tax free to the beneficiaries. In some cases the beneficiaries of the insurance pay the premiums. Not everyone can qualify for insurance though so let’s look at another solution.
You could transfer a cottage to an ‘inter-vivos’ (living) trust if there is currently a small capital gain (the transfer of the cottage asset into the trust triggers capital gains). This would effectively transfer any future capital gains to the beneficiaries with related taxes deferred until they sell or transfer the cottage to their heirs.
The transfer can take place into this “discretionary” trust and the owners will have unlimited use of the property as well as complete control. This would allow time to decide who the beneficiaries will be. At some later date the property can be rolled out of the trust to the beneficiaries.
If the parents are over 65 an ‘alter ego’ or ‘joint spousal’ trust could be used. With these types of newer trusts there is no deemed disposition of property when the cottage is transferred into the trust. Use of either of these trusts will be most useful if privacy, probate costs, or suspicions that someone may contest a Will are concerns of yours.
A word of caution.
There have been suggestions that the cottage can be transferred into joint names with the eventual beneficiaries. While this may have the effect of passing the property by "rights of survival" at death, it has drawbacks. If this is done there may be a capital gain at the time of transfer, the property would be in "joint control" with all owners and it would be subject to claim if there were a marriage breakdown or by creditors of any of the owners. This is clearly not always a good solution.
The family cottage can be a source of great enjoyment and fond family memories. For many of us it is important to plan for the appropriate transfer and to provide for liquid cash to pay any taxes.
While most would agree that passing on the cottage property you love to your children is a great thing to do, it has the potential to create huge family rifts if not planned properly and very well communicated. Take the time this summer to talk with your family about what you have in mind. Once that’s done, meet with your advisor(s) to determine the most effective way for you to accomplish the transfer.
Keir Clark, is a senior wealth advisor, with Clark Wealth Management Group and branch manager at ScotiaMcLeod in Fredericton, NB. He can be reached online at www.keirclark.ca or by telephone at 506-450-6465.

Information and opinions contained herein have been compiled from sources believed reliable but no representation or warranty, expressed or implied, is made as to the accuracy or completeness