Financially Speaking

In sports, a perfect pass is a thing of beauty. Your cottage is also a thing of beauty – a place for fun times with the people you love. But at some point, you will want to pass your cottage on to others, probably your adult children. To help you avoid potential obstacles like excessive taxation and maybe even some surprising opposition, here’s how to make the perfect cottage pass and ensure it will stay in the family for a long time to come.

Don’t get blindsided Wayne Gretzky famously said that he skates to where the puck is going to be, not where it has been. When you’re thinking about who to pass your cottage to, do you rely on what has been or do you consider what is going to happen? For instance, your adult children have always enjoyed the cottage – but will they in the future when you’re no longer around? Talk to your children now and if there are those who do not want ownership responsibilities, you can help avoid future family squabbles by ensuring they are treated fairly in your will.

Make the easy pass Plan now to avoid excessive tax liabilities when you make the pass. Unless you’re passing assets to a spouse or common-law partner, when you die you’re deemed to have disposed of your capital assets at fair market value – meaning that if your cottage property has appreciated, your heirs could face a significant capital gains penalty.

A less-taxing pass: Transfer the property to your kids while you are alive, either as an outright gift or by selling it to them at fair market value. (Selling for less can result in double taxation.) Spread out the capital gains triggered by the sale by making the payments over a five year period and claiming the capital gains reserve, so that only 20% of the capital gain is taxable in any one year.

Alternatively, transfer the property as a trust, with your kids as beneficiaries. This transfer option will also trigger an immediate capital gain but future capital gains on the property will accrue to you children and are not payable until they sell the property.

Insure your pass Cover cottage capital gains – and other estate debts – with permanent life insurance. The death benefits are usually tax-free and can provide an essential source of cash to pay any taxes so your family won’t be forced to sell assets, such as your cottage.

The perfect cottage pass should be an essential part of your overall financial and estate game plan. Your professional financial and legal advisors can help ensure your plan is perfect for you.