Cottage life can be dangerous. I recall reading about a moose hunter who, last October, missed his target and hit a cottage in the distance, wounding a man in his seventies as he answered nature's call.
The lesson to be learned here? Endangerment at the cottage can start anywhere – even in the bathroom.
Another risky location can be the dinner table – usually when talking about the future of the cottage. Last week I introduced questions you should be asking at the dinner table to figure out who, if anyone, in the family would be good candidates to inherit the cottage. Once you've determined that the cottage should stay in the family, you need to think about the timing of a transfer, and how that transfer will take place.
Today, let's focus on timing. When should you transfer the cottage to your heirs – during your lifetime, or upon your death? Here are the things to consider when making that decision.
1. Tax issues: Transferring the cottage today, rather than at death, can pass the future growth of the cottage to your heirs, allowing you to avoid tax on that growth at the time of your death. This works best if the transfer can take place with little or no tax cost today (if the property has not appreciated in value much, for example). Keep in mind, a transfer to someone other than your spouse is treated as a taxable disposition. Finally, think about whether you're willing and able to use the principal residence exemption to shelter a transfer of the cottage from tax. If so, tax issues won't likely drive your decision to make the transfer today or on death; other factors may be more important – so read on.
2. Practical issues: Transferring the cottage to the kids during your lifetime can allow you to see, firsthand, how they can manage sharing the property. You can provide guidance along the way if necessary – setting them up for success when you're gone. Giving them ownership can also encourage them to be more involved in the maintenance and upkeep since ownership comes with responsibility for these things. What about your own desire to continue to use the property? If you don't care to use it much any more, it becomes easier to transfer ownership today.
3. Emotional issues: Some people want to be around to see their kids enjoy ownership of the cottage, making a transfer today a good idea. This can also encourage use of the property for bringing the family together to create great bonds and memories – sometimes even more than if you had continued to own the property and the kids worried about impinging on your time there.
4. Asset protection: Some family members may be more susceptible to legal battles than others. Business owners are often at higher risk of lawsuits or claims by creditors. It often makes more sense to keep assets in the hands of those who face lower risks of these claims. This might affect your decision about whether to keep the cottage in your name or transfer ownership to a child. If you do transfer the cottage today, consider taking back a mortgage on the property to give you control over the property in the event a creditor or the ex-spouse of a child tries to make a claim.
5. Retirement planning: Do you need to sell the cottage to raise money for retirement? If so, then a sale during your lifetime could be important. If the kids are willing and able to buy the property, then it's a straightforward decision to decide to transfer ownership today. Consider a vendor-take-back mortgage where you provide the financing your kids need and they make payments to you monthly. This could provide you with cash flow in retirement.
6. Maintaining control: Transferring the cottage today doesn't have to mean giving up control. You could, for example, transfer the property to a trust where you are trustee (speak to a tax professional about the 21-year rule and principal residence issues), or you can enter into an agreement with the kids that can govern issues such as the terms under which the property can be sold or mortgaged, and use of the property.
Tim Cestnick