Skip to main content
estate planning

Getty Images

That final financial plan – putting your estate in order – is a gift you give to your heirs. But it can be a gift laden with emotional baggage, particularly in the case of that most sentimental of assets, the family home.

High-net-worth individuals have several ways to pass down a house without causing family rifts or crippling tax burdens.

Even if the parents have multiple children, chances are high that none of them will be interested in keeping the family home because they have households of their own, advisors say. In this case, an executor or trustee can sell the house and include the proceeds in the estate to be distributed to the heirs.

But what if one child wants to keep the house but his or her siblings want it sold on the market to maximize the yield? What if more than one child wants the house? If the heir set to inherit the house already owns a home, he or she won't be able to use the principal residence capital-gains tax exemption; is there a way to reduce the tax hit when he or she sells the family home?

Parents should know well ahead what the scenario is likely to be after they die, says David Koski, a lawyer at the Estate House, an Edmonton firm devoted to wills and estates.

"There should be a discussion with the children," he says. "Don't make assumptions, and get a sense if there are going to be competing interests."

If parents anticipate rocky times ahead, they should consider seeking an executor outside the family, Mr. Koski says. Some people want to keep family secrets, or shy away from the expense of a corporate trustee. But that expense is nothing compared to the ultimate cost of a long court fight.

"Be honest in your assessment of your children's relationships," he recommends. "If there is any suggestion of disconnect, don't expect those fractures in family relationships to heal when you're gone. Look elsewhere for someone to take on the responsibility of executor," who might be the one who has to decide the disposition of the house.

Parents also need to consider the ability of their heirs to handle the taxes, maintenance and upkeep of a pricey family home.

"A lot of time the children aren't capable of affording the maintenance on a house that they might inherit," says Martine Tollefson, senior estate planner at MacMillan Estate Planning Corp. in Calgary.

Some families use insurance policies to cover off the difference. It "will either pay out the other children or take care of the maintenance that might be involved or the taxes that might be involved," says Ms. Tollefson.

Some parents consider putting a child on the title of the house while they are still alive, believing it will simplify things when they die. But Carol Bezaire, vice-president of tax and estate planning for MacKenzie Financial in Toronto, discourages this practice.

She offers a what-if scenario: "One of the parents passes away. One or another of the kids moves back with the surviving parent. Because they're trying to save probate cost, that kid puts his name on the house so he becomes joint [owner] with right of survivorship, and inherits the house with no probate.

"But then what does the other kid get?" says Ms. Bezaire.

"Talk to an accountant, talk to your lawyer, talk to your advisor, because as soon as you put a child on your house, joint with survivorship, you lose flexibility," she says. "If the parent decides to sell the house and go into a retirement community or something, that kid has to sign off with you, and quite often they don't because it's the family home."

Mr. Koski agrees that joint title is a pitfall.

"Once you make that gift you can't change your mind," she says. "There may be a falling out later in life where you don't want to extend that gift, or they may develop a personal problem that would cause you to reconsider the wisdom of the gift. A person who develops a gambling addiction or drug addiction – they're now the joint owner of their home. … You're potentially exposed to all their credit risks."

The downside of joint title extends to the heirs, as well.

If the child isn't living in the home at the time his or her name is put on the title, they have a partial interest in a property that is not their principal residence. That starts the clock running on value accrual from the viewpoint of the Canada Revenue Agency, Mr. Koski says. So the child is subject to capital gains if and when they sell the property after their parent's death.

Parents can use workarounds, he says, such as "an expressed trust agreement, where the child holds as bare trustee for the adult."

A bare trust is one way to satisfy the issue of passing on the home while parents are still living, Ms. Tollefson says. "We do it a lot if a parent is insisting on putting a child on title for primary homes or farms," she says. It indicates that the child is holding the property in trust for the parent.

"That way on paper, the child is on the title, but if someone is trying to sue [the child] they're just holding it in trust for the parent."

But few people avail themselves of this option, and they are unwittingly exposing themselves to potential tax problems, Mr. Koski says.

Ms. Bezaire says at her firm the "alter ego trust" has become popular for high-net-worth individuals. "It is a revocable trust – if you're 65 or over it's almost a will replacement," she says. The trust does not form a part of the estate upon death, which avoids delays and certain fees.

"It will bypass the will and the kids become the residual beneficiaries, so the house would go to them without any probate." That saves probate fees on the house, though it does not shelter the estate from capital gains taxes.

Ms. Bezaire also recommends alter ego trusts to deal with worst-case scenarios. Unlike a will, the alter ego trust is a private document. "For a lot of the high-net-worth people, we also have estrangement," she notes. "When there's a lot of money, quite often there's a lot of bad blood. With an alter ego trust you can actually leave one child out of the mix."

If the disposition of the property is handled through a will, "when the will is probated, that child has six months to step forward" and raise an objection. A trust agreement is also more difficult to challenge than a will.

Mr. Koski says he doesn't deal much with alter ego trusts, partly because Alberta does not impose probate taxes. These trusts are more often used in other provinces such as Ontario, British Columbia and Nova Scotia.

"For high-net-worth individuals looking to minimize their probate taxes on death, an alter ego trust makes a lot of sense, providing their wealth is high enough to warrant the expense of setting up the trust."

Interact with The Globe