Financially Speaking

The hand-off. It’s the simplest play in a football coach’s playbook. But as any sports fan knows, even the simplest play can go wrong for any number of reasons. The same could be true of your family cottage hand-off.

It has been in your hands for years and years of fun times with the people you love. But, the day will come – maybe sooner, maybe later – when you will want to hand-off your cottage 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 perform a cottage hand-off that ensures it will stay in your family’s hands for a long time.

Call the right play A successful hand-off starts with everyone on your “team” being on side. Yes, 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.

Elude potential blockers Plan now to manage potential tax liabilities when you make the hand-off. 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 significant tax on capital gains realized.

A less-taxing hand-off: 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.) If you sell the cottage for fair market value, make the payments receivable over a five year period and claim the capital gains reserve, so that only 20% of the capital gain is taxable in any one year. Regardless of whether you gift or sell, consider whether the principal residence exemption should be claimed for all or a portion of the years the cottage has been owned.

Alternatively, transfer the property to 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 your children and are not payable until they sell the property.

Insure your hand-off 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 taxes resulting on death so your family won’t be forced to sell assets, such as your cottage.

Of course, your cottage hand-off should be an essential part of your overall financial and estate plan, so talk to your coaches – your professional and legal advisors – about what’s best for your game plan.