By LINDA A. FOX
Ah, memories. Plunging off the dock into the lake with your friends, roasting marshmallows over an open fire, and Dad fixing burgers on the grill. Black flies and scraped knees.
These are the things that most adults remember about their childhood summers spent at the family cottage. But, as with all things, childhood comes to an end; we get older and so do our parents.
That summer property by the lake suddenly becomes more than memories. It becomes an asset. Something to be thought of in terms of cold, hard cash …whether we like it or not.
The family cottage can be a source of joy or a source of family squabbles for generations to come, depending on how it is passed down.
We don’t usually think twice about estate planning for our prinicipal residence, or stocks and bonds and other financial holdings. But when it comes to the cottage or any vacation property, there are a number of additional and more complex factors to consider.
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First thing to seriously determine, if you are the aging cottage owner, is if your children really want the property. What is their lifestyle? Are they city oriented? Does one son or daughter live too far away to take advantage of the property? Would one of the children enjoy it more than the others? What about their spouses and children?
The best option might be to sell it and simply have the money go into your total estate, if you feel your beneficiaries are not the cottage lifestyle type. Another thing to consider is if your kids can actually afford to inherit the property. It could be a huge financial burden to them in the long run.
If you decide to leave the property itself, the main thing to consider is capital gains. If a cottage was purchased in the late 1950s for a few thousand dollars, it could be worth more than hundreds of thousands of dollars today. The capital gain on the property is significant - so are the taxes to be paid upon inheritance.
Real estate lawyer Alan Silverstein says one way to reduce the financial blow of such an inheritance is to put the names of any adult children on the cottage deed now. That would make them joint tenants along with the parents and would not subject them to capital gains tax when the parents died. Only if and when they sold the property later.
Another advantage, says Silverstein, is that by having joint tenancy, probate fees can be avoided when the parents pass away.
Another way around the issue is to transfer the cottage deed to an adult child who does not already own a principal residence, leaving room for the "principal residence exemption." A third option is to transfer the cottage into a trust.
A trust is a legal entity but it does not have to file a tax return, if no income is earned. However, trusts must pay capital gains tax every 21 years. One way to cope with immediate capital gains pain is by deferring it.
It is true that many cottage owners don’t consider their property an investment, but more of a collection of memories. Memories they wish to pass on to the next generation.
But let’s take a look at an example of how much that cottage really is an investment, courtesy of www.9dots99.com
The estate planning website describes a cottage property originally purchased at $5,000. It has had $25,000 spent on renovations for an adjusted cost base of $30,000. In today’s market, that same cottage and land is now worth $450,000 for a capital gain of $420,000. The taxable capital gain (50% of the actual gain) is $210,000. If that cottage is now sold or left to the children via the estate, the tax liability is a whopping $105,000.
So in any number of families, the heirs can not really afford to inherit the family cottage.
The best advice from the National Network of Estate Planning Attorneys is to "sit down with your kids and discuss which, if any of them, would like to have the cottage." After that, carefully go through the financial implications for each adult child and come to a final agreement. Having the cottage stay in the family is a romantic idea, but one that might not be feasible.
A number of online sites can help with useful information, including:
