Life at the cottage generally includes some bugs. But you hope not to encounter too many bugs in your cottage estate plan. One benefit of planning ahead is that your family may be able to better afford to keep that slice of heaven. Chris Gandhu, High Net Worth Planner with TD Wealth, joins Kim Parlee for a three-part series on cottage succession. In part three: The different ways you can pass on the cottage.
- Welcome back to the MoneyTalk cottage show. We've been talking about how to buy a cottage. We've talked about taxes. Now we're going to put it all together and talk about the proper way to structure things when you're thinking about buying and your estate planning in that cottage. Chris Gandhu, of course, high net worth planner with TD Wealth joining us now. Chris, So let's start. Someone who's watching, they're say, OK, I am now in the process of drafting up my estate plans. What do they need to consider when they're thinking about the cottage?
- Right. So let's think of it as a decision tree. First, are you going to keep it or sell it? And selling it is easy. Keeping it requires some planning. And if you've decided that you do want to keep the cottage and pass it on to the second generation, then the next question you to think about is, well, do I want to transfer ownership to the next generation today while I'm alive? Or do I want to transfer that ownership after I pass away?
And after you've passed that hurdle, then you want to think about, OK, well, if I do want to pass ownership to the next generation today, am I comfortable doing that outright? Or do I want to use a structure, such as the trust, to pass that ownership, yet retain control.
And same thing with the will. If you've decided that today is not the right time, you'd rather pass ownership after you pass away, you have the same two options. Would you rather do that outright bequest? Or would you rather pass it to your children by using a testamentary trust under the will? So I think that's sort of how I see the decision tree panning out.
- Let me pull on one of those branches of the decision tree. The will is probably the one that people think about. It's the most common. I'm not saying it's the best, but it is the one that's most common. What are the pros and cons of that?
- It's simple. It's effective. It's easy to update. If plans change, you should be updating your will every few years anyhow. And all your testamentary instructions can change along with that, including the cottage planning. The complication is that if you're passing on assets through your will, understand that it is subject to probate. So in certain Canadian provinces, that means a probate fee. Of course, all the tax that you've accrued during your lifetime when you have owned that cottage is now going to be crystallized at the date of death. So you have an income tax bill to worry about as well. And sometimes that probate process, that estate administration, can be lengthy. It could be 6, 10, 12 months long. So understand that the finality of your settling of the estate may take some time.
- Another one you talked about in that decision tree was joint ownership. That's, again, putting your children as owners of the cottage before you pass away. That comes with its own set of complications. So again, pros and cons on that one.
- Yeah. Again, between spouses it's very common to own property jointly. And it makes sense. You want to avoid probate at first death, automatically transfer to the surviving spouse. But when children are involved, it is sort of a different playing field altogether. First, you own an interest outright. And now you're bringing somebody else in. So there's actually a disposition of an interest. So from a CRA tax perspective, you've actually triggered some tax. Of course, you could always use, if you wanted to, your principal residence exemption, assuming you qualify and the cottage qualifies for it, to shelter that from tax. But that is a concern.
Maybe the bigger concern is loss of control. If you wanted to sell that cottage, mortgage it, well, you can't do that anymore, because you have a joint owner. And you need their consent as well. And heaven forbid should that joint owner have a creditor issue, now this is an asset that they own. And the creditor is going to go after this asset. And that may mean selling it or losing their cottage outright. So just watch out for those things.
- Yeah, creditor issue or a marriage issue, right? That can happen on the other side, which can turn into a creditor issue. But yes, lots of things to contemplate on that side. What about just selling the cottage to the kids? I know that I spoke with lots of people. Sometimes they advocate for that, because that shows you that they actually value it and want to buy it.
- Yeah, I think that's a great option, especially if you need the money. So selling it to the children obviously means you're crystallizing tax today as if you're selling it to a third party. Again, crystallization of tax is not a big deal if you're going to use a principal residence exemption. If you're not going to use that exemption or only partially going to use that exemption, then this is some number crunching that you want to do ahead of time just so you're prepared for it, because that tax bill will come due.
The second practical point here is that, although you may want to sell to your kids and you may need that money, I wonder if the kids have the money to buy that cottage from you. So there is some financing and liquidity concerns. Of course, they could always go to the bank to finance. But you could also be their bank. So they could give a mortgage out to you. So I think this is a fine planning option if it works for your paths.
- OK, all good things to think about. Last question for you, if you were to sum it all up, and what are the top three things to consider when you are getting ready to pass down that cottage?
- I think I've mentioned this already four or five times in the call today, but understand that even though you may own multiple properties, your vacation property, your cottage, can still qualify as your principal residence, which means you may be able to use your principal residence exemption against it. So I think you do need to fully investigate that.
The second thing is we've sort of talked about keeping the cottage in the family and passing it on, which is a fine thought. But practically speaking, if you have multiple kids, who's going to get the cottage for spring break? Who gets the long weekends? Who gets the summer holidays? So I think you do need to think of some sort of a co-ownership agreement with the second generation, because without that, you're perhaps setting them up for failure.
And finally, Kim, you sort of brought it up that the biggest creditor out there is perhaps a child's ex-spouse. So as you're doing your planning, be honest with yourself. If you feel that is a planning consideration for your family, then I think you do need to give that a bit more thought and perhaps use it for maybe as a trust as an intermediary.
- And finally, Chris, just before I let you go, I think the one thing that I'm hearing from everything is these are often very bespoke decisions to your personal finances, your family, your assets, where things are. So it's really worth talking to somebody.
- Absolutely. I think this is complicated. They're expensive assets. So you've got to get professional help.
- Chris, thanks so much.
- Thank you, Kim.
- Chris Gandhu, high net worth planner. He joins us from Calgary, Alberta. That is it for our show tonight. Thank you so much for watching. Any comments or questions, we love to hear from you. Send them to firstname.lastname@example.org. And a reminder, if you want to see this interview again, jot down some notes, or see anything else, you can go to moneytalkgo.com as well as moneytalkgo.com/life.
Thanks so much for watching. Be well, and we hope to see you again next week.