Solutions to Cottage Tax Problems

One of the most difficult asset transitions can involve the family cottage. In this second of a two-part article in family cottage planning, Knowledge Bureau author David Christianson discusses potential solutions to this sticky issue.

The first step is to determine who in the family really wants the cottage, can afford to keep it up and will play well with others, if sharing among siblings. I leave that up to you for now. The family cabin can have a lot of sentimental value for family members, so this may be tough.

If you expect some siblings to want the camp property and not others, you can put a clause in your Will that allows any to use some of their other inheritance to purchase a portion of the cottage, or to decline that option. Ownership of the property may be divided into as many parts as siblings who want it. The others could take cash.

Also think now about how the usage and upkeep responsibilities will be determined.

On the tax side, be creative in how you use that principal residence exemption. It does not have to apply to your house in the city. On the death of the second spouse (or a sale of both properties), both residences are deemed to be sold. The executors can decide after the fact which one is treated as the principal residence. Obviously, pick the one that has gained the most in value since purchase.

When calculating the gain, obviously, include all allowable capital expenditures – things like new dock, erosion protection, cottage additions, new driveway – in the cost base, to minimize the net gain that must be claimed.

If you have been fortunate enough to have had both properties increase in value, then you should make arrangements now to have the cash available for the future tax, when that time comes. The best way to have guaranteed cash available upon death is a life insurance policy. In this case, a joint and last-to-die term-to-100 or universal life is probably the ideal type of contract, although whole life also works. Last-to-die polices are cheaper, as the rates are based on the spouse with the longer life expectancy.

The death benefit is tax free and will enhance the estate, making sure the liquid cash is there for the taxes.

An alternative is to take action now and transfer the cottage into the children’s name, or into the name of a corporation or trust for their benefit. However, half of any gain to the date of transfer will be taxable.

The advantage of these more complicated arrangements is that the corporation or trust does not die. The cottage can be held into future generations without a disposition of the property. However, you must plan ahead for the transfer of the shares or the trust interests.

Think about it now – over cocktails and summer sunsets! With the right professional help, planning can save you a bundle down the road.

David Christianson, BA, CFP, R.F.P., TEP, is a financial planner, adviser and vice-president with National Bank Financial Wealth Management and author of the book Managing the Bull, David was recently named a Fellow of FPSC and he will act as Master of Ceremonies at our 10^th Annual Distinguished Advisor Conference this November in Ojai, California.

Article originally posted on DavidChristianson.com. Republished with permission.