There are a number of things to consider when transferring a cottage to family members. The first thing to consider is “what is the plan for the cottage” as far as transferring to heirs. Is the cottage going to be transferred now or upon death. Is it going to a single individual or joint ownership? If joint ownership then you need consider the impact of the heir’s decision in the future and their financial situation including potential credit risks if one heir has a credit history problem. To do this it is important to understand the intentions and nature of the heirs involved. This includes everything from their future involvement in the cottage, what happens when they get married and their own personal financial situation. Once this is established, it a good idea to get a financial planner like M2 Financial involved. The Financial Planner will assist you in generating a net worth statement to determine what assets are available for distribution to the heirs. This is important to ensure there is equal distribution among the beneficiaries in order to resolve any potential disputes in the future. A cottage would be part of this consideration, especially if the assets are not equally distributed. For example one beneficiary may receive the cottage (100%) and the other beneficiaries may receive cash or other assets of the estate. The importance of the net worth is it will establish if the goals to the beneficiaries are going to be meant. If not then there may be ways to ensure the objectives are meant by using for example life insurance to provide for any cash shortfalls.
The other major factor to consider is the impact of capital gains on the disposition of the cottage. A tax planner like M2 Financial can minimize the tax consequences. Reviewing the cost of the property is important if the cottage has been held for several years and what costs can be added in the future reduce the gain. A tax planner would review the use of the principle residence rule in regards to the cottage and house to minimize the gain upon the transfer of assets to beneficiaries and how the principal residence exemption may benefit beneficiaries in their own tax planning in the future. A tax planner will also consider using a trust or a deemed mortgage in order to minimize the capital gain. Using a trust now may defer the capital gain for 21 years and may have it advantages if the cottage was just recently purchased or the fair market value is low.
Reviewing these and many other items can ensure that the family assets, including the cottage can be enjoyed in the future with minimal disputes and significant tax savings.
Brought to you by Tim Manery, B. Comm., DFA, M2 Financial Solutions