My anniversary is coming up in two weeks. For our first anniversary many years ago, I bought Carolyn a 50-piece dinner set – called a box of toothpicks. That didn't go over so well. The next year I bought her some new golf clubs, which she thought was an improvement (until she found out that the clubs happen to fit me perfectly).
This year, I'm going to surprise her with some new real estate. Not a new home. No, I'm talking about burial plots – you know, at a cemetery. I've been getting our estate planning in order. She'll love it. And part of our estate planning involves deciding how to transfer the cottage to the kids after we're gone. Last week, I talked about transfers during your lifetime. Today, I want to talk about transfers after death.
1. Gift the cottage on death
You can simply leave the cottage to one or more of your heirs in your will. Make sure you clearly understand whether they truly want to inherit the place (see a previous column). If you're leaving the cottage to a certain heir but not all of them, make sure you understand whether there will be a tax bill on the cottage at the time of your death (which is likely if it has appreciated in value) and what resources will be used to pay those taxes. You might short-change an heir if one inherits the cottage but another must pay all or part of the taxes on the cottage because perhaps they are inheriting the only liquid assets of your estate.
2. Joint owners with right of survivorship
One way to transfer the cottage to your heirs after you're gone is to own the place today jointly with them, with right of survivorship. Upon your death, the property will transfer to the surviving joint owner(s) automatically (in Quebec, the concept of undivided co-ownership, "usufruct" or right of use can be used; speak to a lawyer and tax pro in Quebec about these concepts). This will bypass your estate and save probate fees in provinces where they apply, although it won't avoid income taxes (unless the joint owner is your spouse). The drawbacks here can include a taxable event when putting an heir on title as a joint owner (if beneficial ownership has changed), subjecting the property to creditors of your heirs, and giving up control of the property. Check out some other drawbacks of joint ownership in my article at tgam.ca/joint-ownership.
3. Leave it in trust
You can leave the cottage to your heirs by way of a testamentary trust – a trust set up in your will to hold the property. This can be practical if you want an effective governance vehicle to manage the property that will be shared by more than one family member, and creditor protection for the cottage. A trust is also helpful if you're leaving behind cash to help cover some of the ongoing operating costs of the cottage; the cash and the cottage could both be held in the trust and managed by trustees that you name. There will be some tax planning to do as the 21st anniversary of the trust approaches since the assets of the trust will be deemed to be sold on the 21st anniversary of your death.
4. Provide a right of first refusal
Sometimes selling the cottage after you're gone is the best way to ensure that all heirs receive an equal share of your estate. After all, it's easier to divide up cash than real estate. You can provide those heirs who would like to own the cottage with the right of first refusal to buy it from your estate. This will ensure that those heirs who don't want to own the cottage will still receive their share of the value of your estate.
5. Minimize the impact of taxes
You can minimize the amount of tax that might otherwise be owing on the cottage at the time of your death by leaving the cottage to a surviving spouse, or by using the principal residence exemption to shelter the gain from tax. Upon the second spouse's death, of course, there could be tax to pay if the property has appreciated in value. Also, consider investing in life insurance to cover the taxes owing at the time of death so that your estate is not depleted by the taxman.
Tim Cestnick is managing director of Advanced Wealth Planning, Scotiabank Global Wealth Management, and founder of WaterStreet Family Offices.