Your Cottage And Keeping It In The Family

Ahh, your cottage – a place of sanctuary, family fun and warm memories. But passing along a cottage to the next generation can set off complex financial and family issues. Here are some suggested steps to ensuring cottage continuity.

Know what your kids want - You know that cottage ownership is a big personal and financial responsibility that is not for everyone. Discuss this with your children and if any of them are not interested in inheriting the cottage, avoid family squabbles by making sure they are treated fairly in your will.

If you decide on shared ownership, keep in mind that it can be a difficult proposition. That’s why it can be useful to obtain legal advice when you put an agreement in place – about such things as who uses the cottage and when, who pays for repairs, maintenance and upkeep, and the other nitty-gritty aspects of joint cottage ownership – to avoid protracted disputes and misunderstandings.

Manage the tax burden - If your cottage has appreciated in value, your estate can face a significant capital gains liability that could force its sale by your heirs.

Capital gains taxes are based on the difference between the cost of your property and its current fair market value at the time of your death. The cost of your cottage is what you initially paid for it plus the value of any capital improvements you made to it over the years – a new deck or roof, for example, including the cost of anyone you hired to do the work for you – so keep your receipts to account for all these costs to help offset capital gains. General upkeep costs such as painting the cottage are generally not considered capital improvements.

Consider taking advantage of the primary residence exemption. You are allowed to name a primary residence that is exempt from tax on capital gain. The residence must be a property you ‘ordinarily inhabited’. It can be either your city home or your cottage. You are allowed just one principal residence at a time but you can choose to exempt the property with the bigger gain.

Have a succession plan - Include an effective strategy for passing on your cottage. One option is to purchase life insurance with tax-free death benefits that will cover the capital gains on your cottage and/or other expenses and avoid the forced sale of estate assets. Life insurance is also a good way to equalize an estate where one child wants to keep the cottage, whereas other children would prefer to sell it and divide the proceeds of sale.

Some of these estate planning options may not work in your situation, so it’s a good idea to talk to your professional advisor about your wishes for your cottage and the financial and estate planning options that will work best for you.

Giving While Living - Keeping It In The Family

You may be among the growing group who hope to pass on wealth to their children during their lifetime. A recent research study showed that the majority of Canadians (63 per cent) believe it's best to give children financial gifts while the giftor is alive.

The 'giving while living' trend has significant implications for tax and estate planning - and for your own lifestyle. That's why your first step toward making a 'giving while living' decision should be to take a critical look at your own finances. If you are certain your finances will allow you to make a gift, here are some other things to consider:

What should I give? The simplest answer is cash - but that may not be the best choice. When you give cash, you also give up any control over the amount you have gifted and you may not want to do that. One solution is to characterize your gift as a loan and take back a promissory note with appropriate security - that way, you can maintain a certain amount of control over the funds and the way they are used.

Another option is to give a 'non-cash' gift - maybe transferring stock to a child, or even the ownership of your family cottage - but, in that case, you will likely be triggering any unrealised capital gains. For example, if the gifted stock or cottage has appreciated significantly in value, most of that value will be subject to an immediate capital gains tax (currently the taxable amount is 50 per cent of the appreciated value).

Selling the 'gift' for $1 does not solve the tax problem and may, in fact, make it worse. When assets are given to someone 'at arm's length', the Canada Revenue Agency (CRA) deems that the donor received Fair Market Value (FMV) for the asset, no matter what it was sold for.

Should I put conditions on the gift? You can - some parents elect to 'gift' assets but only under certain clearly stated conditions. For example, you may want the funds back in the event of a marriage breakdown or if your child predeceases you and you don't want one of their heirs (perhaps a new spouse) to receive the funds. Any conditions like these should be specifically set out in writing. You should also check with a lawyer to ensure your wishes are legally binding.

Can I give a gift to a minor? Yes, and if it's a small gift, that's pretty straightforward. But if the gift is significant it may be wise to wait. For instance, a minor can't invest funds in their own name so future use of the gift can become problematic. In most cases, it's best to make a large gift to a minor in your Will.

If you are thinking of giving while living, you should do it in the context of your overall financial and retirement goals. A professional planner or financial advisor can help you make the best decisions for your situation.

The Cottage Hand-Off - Who Will Receive?

It's your cottage now, but whose will it be in the future? Your family has always had a great time there, so it's natural to assume you'll simply hand it off to your family after you're gone. But have you asked your adult children if that is really what they want? And if it is, will they be financially able to keep it in the family? Here are a few steps you should take to make sure you don't fumble the cottage hand-off.

Have a cottage conversation

Sure, your adult children have always enjoyed the cottage - but will they in the future, when you are no longer around? You know that owning and maintaining a vacation property is a big responsibility and it's not for everyone. That's why you should talk it over with your children now. Find out who wants to take on the responsibilities of ownership and who doesn't. Then make arrangements so your non-cottage inheritors will be treated fairly in your will. That way family squabbles can be avoided.

Make the hand-off less taxing

Plan now to avoid a stiff tax liability when the hand-off occurs. Unless you're passing assets to a spouse, when you die you're deemed to have disposed of your capital assets at fair market value. If your cottage property has appreciated in value, your estate will face a significant capital gains liability. You do have the benefit of a principal residence tax exemption but it applies to just one property at a time. That can be either your cottage or your city home but the one you don't choose will be subject to tax on its increased value.

There will also be tax consequences if you leave the property to your children in your will. A better alternative may be to transfer the property to your children while you live. You can do that as an outright gift of the property or by making one or more of your children joint owners of the property (with or without you as joint owner). You can also transfer the property to a trust, with your children as beneficiaries. Each of these transfer options may trigger an immediate capital gain - but future capital gains on the property will accrue to your children and are not payable until they sell or transfer the property.

A trust also offers the benefit of allowing you to maintain control of the property during your lifetime or through an independent third party (the 'trustee' - who could by your executor) after you die. This can be an effective alternative to manage conflicts over the cottage. Or, if your children are too young or otherwise not ready to take on the responsibilities of ownership, the cottage may be held in the trust until they are ready.

Life insurance can also be a good strategy for covering capital gains taxes on your cottage. The death benefits from the policy are usually tax-free and can be used as a ready source of cash to avoid the forced sale of estate assets, like your cottage, if other funds are not available to pay the capital gains taxes.

It's a good idea to think about your wishes for your cottage as part of your financial and estate plan. A professional financial advisor can help you work through the options that make the best sense for you.

Life Insurance Can Be Part Of Your Retirement Plan

The right kind of life insurance can do much more than provide a tidy sum to your heirs. It can be a good, tax-deferred place to stash the cash you have left over after maxing out your RRSP contributions.

There are two basic types of permanent life insurance that allow excellent flexibility in building tax-advantaged savings and accessing the cash inside them:

· Universal Life is a type of policy that lets you vary the amount and timing of premium payments as well as allowing you to save money inside your policy, protected from taxation.

· Whole Life is a cash value life insurance policy that provides a specified level protection for a premium that will not change unless the level of coverage changes. It also includes a savings feature similar to a Universal Life policy.

Insurance can be a source of liquid savings

As you pay the premiums on your permanent life insurance plan, the cash value of your policy increases in value over time on a tax-advantaged basis. You can access the cash value of your policy in three ways:

1. Withdrawal - You permanently withdraw some or all of the cash value of your policy. This reduces the future growth potential of policy cash values and may reduce the policy's death benefit. Every dollar is taxable, and the amount withdrawn cannot usually be recontributed.

2. Policy loan - You obtain a loan from your insurer secured against the cash value of your policy and the policy continues to grow uninterrupted. For tax purposes, your loan is considered to be first drawn against the tax-free portion of your policy until that component is reduced to zero. After that any remaining portion of the loan is taxable. Loans can be repaid (or the amount plus any accumulated interest will be deducted from the proceeds paid to your beneficiary), and you will get a tax deduction for your repayment up to the amount of any taxable income you declared when you took the loan.

3. Collateral loan - You use your policy as collateral for a line of credit and your policy is assigned to the third-party lending institution. This option does not result in any taxable income to you. You'll usually pay interest on the outstanding balance of the loan and, if you die, the lender receives repayment of the loan (and any unpaid interest) from the proceeds of the policy, and your beneficiary gets any remainder.

By giving you the ability to accumulate tax-advantaged growth in cash value and tax-free benefits to your beneficiaries, permanent life insurance can be an important tool for you to consider. But keep two things in mind: Make your choices based on an overall plan aimed at reaching your financial goals and remember that tax laws can change - so be sure to consult a professional advisor who can help determine what's best for you.

Are You Ready To Pass The Family Farm On To The Next Generation?

If you’re a Canadian farm owner over the age of 60, you’re part of a growing group. According to Statistics Canada, there are now more Canadian farm owners in your age bracket than ever before*. Whether you’ve reached your sixth decade or not, you may be thinking of retirement – and of what you’re going to do with the family farm.

You probably want the farm to stay in the family – but which of your children should get it … and where does that leave your other children? Then, there’s you and your spouse -- the choices you make can have a huge impact on the level of your retirement income. They can also affect the amount of taxes your estate will pay.

Farm succession planning is a process without a one-size-fits-all solution. A farm transfer and estate plan could help smooth the transition from one generation to another, ensure you get the retirement income you need, and limit estate taxes. Here are some basic steps to developing the plan that works best for you:

• Review your current situation – the net worth of your family and your farm and your current cost of living.

• Sit down with your spouse and budget what your retirement expenses will be. If you intend to move off of the farm, you may incur expenses that you have not experienced before such as rent, condominium fees, and municipal taxes including cost for water and sewer. And, don’t forget about replacement of your vehicle every 5 to 10 years. Strive for financial security -- not simply transferring the farm to a child as quickly as possible.

• Determine the most appropriate sources of retirement income for you and your spouse. Would it be better to live on buy-out payments from your farming children (supplemented by investment income) or should some of your income come from your continued involvement in the farm? Keep in mind the potential cost of debt servicing to the farming children.

• Get everybody involved – you and your spouse, your farming children and non-farming children. Ask each person, “What does the farm mean to you?” You may be surprised at the answers. By taking each person’s hopes and expectations into account, you’ll avoid future disagreements and ensure family harmony after your death.

• Treat all of your children fairly and equitably – but not necessarily equally. Consider life insurance as a useful tool in funding an equitable distribution to your non-farming children and/or covering estate expenses.

• Preserve the value of your farm by ensuring it (and your estate) qualifies for all the special tax reductions available to you – especially the $750,000 capital gains exemption for qualifying family farms and the tax-free rollover of farm assets to children through various forms of equity transfer.

Tax laws associated with farms and succession are complex. Be sure to get expert advice from your lawyer, accountant and financial planner who can quarterback your team to succession success.