Succession Planning

22 March 2011 About The Finances

How do you set up a cottage succession plan?
Succession planning for the cottage is a difficult but important task. While other areas of the estate may be easy to deal with, the cabin requires special attention because there is so much emotional attachment. To ensure the family cottage continues to be a place of happiness it is essential that the proper succession steps are taken.

Cottage Inheritance and Succession

Estate planning for the cottage should involve all of the stakeholders right from the beginning of the process. Whether the children are the best of friends or haven’t spoken to each other in years, it is important to communicate openly with all interested parties about what is going to happen to the cottage when the estate is being sorted out.

How do you decide who gets the cottage?
If you plan to hand the cottage down instead of selling it, all the cottage succession details have to be sorted out well ahead of time.

Have A Family Meeting
No one likes to have the cottage succession conversation but the parents and all of the children have to meet together to iron out a well defined plan for addressing capital gains taxes, ownership, usage, and operating costs. Some tough questions have to be asked, and they all need to be answered before the parents set the terms in their plan for the estate.

Capital Gains Taxes

How do you deal with capital gains on the cottage?
An old cottage that has been in the family for a long time may trigger a massive capital gains tax.

Principal Residence
Choosing to define the cottage as the principal residence of the owners while they are still alive is one way to avoid placing the tax burden on the estate that would be triggered by the cottage. This option may not always be feasible or beneficial so it is best to sit down with a tax professional to discuss the possibilities.

Life Insurance Policy
If the cottage will trigger a capital gains charge, either the estate or the children have to make an arrangement to cover this cost. It may be possible to take out a life insurance policy that will pay enough to cover this expense. The children or the parents can pay the premiums. Again, visit a tax professional to consider the options that are best suited to your individual situation.

Maintenance and upgrade expenses
Keep all of the receipts for the upgrades, additions and major renovations done on the cottage. These can often be used to increase the adjusted cost base of the cottage. For example, if you bought the cottage for $200K and have put another $50K into it, the price used to determine the capital gains tax would be $250K.

Claim a reserve for capital gains
One tax trick to spread out the tax hit on the capital gains is to sell the property to your children now and have them pay for it by issuing promissory notes. If you don’t plan on collecting the money, you can forgive the notes in your will. The advantage to this option is that it allows you or your kids to pay the capital gains based on today’s price. Also, if the sale is set up correctly, you can claim a capital gains reserve and the taxes could be paid over a period of five years. You need to see a tax expert to set this up.

Gift the cottage to your children
You can also “gift” the cottage to your kids now to avoid paying tax on any future gains in the cabin’s value. This option triggers capital gains on the current value of the cottage and the taxes on those gains have to be paid in the tax year the property is gifted.

Be sure to have the estate lawyer set up a usage agreement that says you have the right to continue using the cottage even though you have given it to the kids.

Cottage Ownership Options

When considering what to do with the cottage after you are gone, it is best to evaluate all of the available options.

Sell The Cottage
In the end the best solution may be to sell the cottage, divide the proceeds, and allow each child to decide how to use the money.  Once the nostalgia passes, this is often the wisest choice.

Property Division
If the cottage property is large enough it may be possible to legally divide it into separate lots. Depending on the size of the property and its location, the process to get this done may be lengthy and costly so it would be best to fully examine the possibilities well ahead time. If dividing the cottage property is possible, you may want to do it now rather than making provisions to have it done as a part of the succession plan.

Hand Down The Cottage
In most cases the existing property gets handed down to the children and they become part owners according to the wishes of the parents. This seems like it should be a simple process but it is often the most complicated option.

Cabin and Cottage Ownership Structures

What is the best ownership structure for handing down the cottage?
Careful attention must be paid to how the new ownership of the cottage is structured when it gets handed down to the children. The original property owners should also consider the ownership path beyond the children.

If you aren’t careful, the family cottage may end up being owned by a different family than you intended.

Co-ownership
Co-ownership means the portion of the cottage that is owned by each person gets passed on according to that person’s will.
Joint Ownership
Joint ownership means the entire ownership stake of a person who dies passes directly to the other joint owners.
Corporation
Another option is putting the cottage under the ownership of a non-profit corporation.  In the case of a big family, this may be the way to go.

Take the time to see a good estate lawyer who specializes in dealing with cottage succession plans. The lawyer can layout all the options and the related pros and cons of each one.

Co-ownership and Joint Ownership Agreements

Usage Of The Cottage Property
A schedule must be created to divide the use of the cottage amongst the different owners.  The rules of the game should be thorough and formalized in writing.

Private Time
Each person should have his/her own private time to use the cottage. It is best to hand the weeks out and then decide whether or not you want to be together later.

Drop Ins
It may be OK for anyone to drop in at any time right now, but when the ownership changes, you have to decide if this is going to be allowed.

Guests
When you are deciding on allocating some weeks to be spent together, decide whether or not it is going to be open for guests and who and how many.

Renters
Someone may decide they want to rent out the cabin instead of using it during his/her allotted time. If this is going to be a problem, it is best to set the rules down in writing ahead of time.

Trades
After the calendar has been carved up, decide whether or not trades or buyouts are allowed.

Cabin Maintenance

A cottage is a money pit.  Planning for the costs is critical to a happy co-existence. Again, the rules must be clearly defined.

Cost Splitting
The costs can be shared equally or split depending on the amount of time each person will use the property. Not everyone will have the same financial means, so someone can be the handyman in lieu of paying in cash.

The estate may set up a trust to pay all the costs. This works well when everyone uses the cottage equally.

Plans for future upgrades and additions to the cottage should also be agreed upon when setting out the cottage ownership terms. It is much easier to deal with if it is all covered in the succession plan rather than trying to work it out later.

What happens if someone stops paying his/her part?
In the unfortunate event that someone stops paying for the upkeep of the cottage, the succession plan should outline what will be done. This can be an ugly situation, so it is best to be clear right from the start. For example, it could be set up to trigger a buyout by the other owners.

Buyout Agreements
A buyout agreement must be set up so that any sibling who decides to get out must sell his/her part ownership of the cottage to the other siblings.  Agree ahead of time on a way to set the price.

Succession planning for the cottage is a delicate process but when done properly the family cottage can be handed down in a structured and peaceful way so that it continues to be enjoyed by everyone.

Go to the How To Sell The Cottage page.
Go to the How To Rent Out The Cottage page.
Go to the Insurance Tips page.

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