Post-Death Gifting of the Family Cottage - Hull on Estate and Succession Planning Podcast #76
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This week on Hull on Estate and Succession Planning, Ian and Suzana discuss post-death gifting related to the family cottage.
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Post-Death Gifting of the Family Cottage - Hull on Estate and Succession Planning Podcast #76
Posted on September 4th, 2007 by Hull & Hull LLP
Suzana Popovic-Montag: Hi, and welcome to Hull on Estate and Succession Planning. You are listening to Episode #76 of our podcast on Tuesday, September 4th, 2007.
Welcome to Hull on Estate and Succession Planning, a series of podcasts hosted by
Ian Hull and Suzana Popovic-Montag, that will provide information and insights into estate planning in Canada, from the offices of Hull Estate Mediation in Toronto, Ontario, Canada. Here are Ian and Suzana.
Ian Hull: Hi Suzana.
Suzana Popovic-Montag: Hi there Ian.
Ian Hull: Well, we’re at 76. That seems like a lot of podcasts and I was, the other day, listening to my regular stream of podcasts that I listen to since I’ve been getting involved in podcasting. And there’s a great podcast called For Immediate Release. And I was listening the other day and laughed out loud as the two great hosts jumped into the opening and said “and welcome to episode 251”. So 70, whatever we’re at now, doesn’t seem quite so overwhelming.
Suzana Popovic-Montag: That’s for sure.
Ian Hull: Anyway, why don’t we continue to flesh out this issue of cottage properties and options and transfers. We talked about lifetime transfers, setting up trusts and so forth. We started to talk about some of the options that are available on death. In our last podcast, we certainly flushed out the concept of joint tenancy, which is the often used estate planning tool with cottages and gifting of that nature. We talked a little bit about gifts by Will and the pros and cons of that, and that fact that there are tax implications you really have to flush out before you want to do that. So, let’s talk about the next option of gifting. And this is a post-death gifting scheme.
Suzana Popovic-Montag: Well, Ian, many cottage owners can make an outright gift of their property in their Will and there is a couple of different ways where you can actually accomplish that. And for example, you can give the vacation property to the child or the beneficiary who you see uses it the most. Or perhaps you could give it to other children or other beneficiaries and give them an equal share of your estate, based on the value of that cottage.
Ian Hull: And, you know, you can also get creative. And, I mean, this is again…we talked about this is the predominant way that these properties are typically passed on. And if you have these sort of open discussions, gifting by Will and outright gifts through the Will and so forth, really are the most pervasive way that estate plans work. And, you know, another option as well is you could give the property to an adult child, like to all of the adult children. Say there were 3 kids. Put it in all 3 names but not as joint tenants, as we talked about in the last podcast, which has its own succession flowing rights. But as tenants-in-common, which is just another option. Basically, you’re slicing it up where each individual child owns a third of the cottage. I’m not saying it doesn’t create its own problems, but you delineate the ownership a little bit and you sort of set the stage for…you protect anyway, the interests of that child for the generations below as well.
Suzana Popovic-Montag: I think, Ian, your Will can also be creatively drafted so as to provide an option to purchase to one or more of your children or give one or more of them the right of first refusal on the sale of the property if you actually go and sell it on the open market.
Ian Hull: And if the property is to go to more than one beneficiary, I’ll often recommend to clients that we set up a co-ownership agreement. And really set out what the requirements are of ownership. Almost like a condominium arrangement per se.
Suzana Popovic-Montag: And you’d actually state that in the Will?
Ian Hull: Well, it’s an option for sure to make that a requirement and you set that right out in the Will itself.
Suzana Popovic-Montag: It seems to me that these kinds of agreements would be probably invaluable when it comes to clarifying what it is that, you know, you actually intended and how to, you know, build in this potential dispute resolution mechanism.
Ian Hull: That’s right because you’re often…you’re setting out the rules of the ongoing relationship and you’re also including in it, if there is a dispute, this is how we’re gonna solve it.
Suzana Popovic-Montag: Another option for transferring a cottage property on your death is to actually do it through a trust that is set out or established in your Will. And in that case, it would be called a testamentary trust, as opposed to the trust we talked about in previous podcasts, the inter vivos or lifetime trust.
Ian Hull: So the trustees of the Will then hold the vacation property or the cottage property in trust for the use by your children, grandchildren or other beneficiaries of your choice.
Suzana Popovic-Montag: And by setting up the trust in your Will, you also have the flexibility to create, perhaps name different trustees. So you can have a trustee of your estate and you can set up a cottage trust with different trustees for the purpose of that cottage property.
Ian Hull: And the testamentary trust, it gives you a myriad of different flexibility and options. And, you know, there’s a range of elements. For another example, like you say, you can split up the role of who is the trustee of which trust. Another example is the trust could be used just for the adult children and give each child the right to require that the property be sold with or without an option for the other children to purchase it from the estate.
Suzana Popovic-Montag: Another option is that the trust could include particular provisions on how to transfer the property to grandchildren at a certain point in time as well.
Ian Hull: And we call those dates the date of division, when you pick the point in time. Often someone will say look, because of tax reasons, we won’t get into an overly complicated analysis of it, but because of tax reasons, you might pick 20, 21 years out of the trust running because by then, the adult children will be old enough that they’ll want to be passing it down to their generation, being your grandchildren. That’s just another flexibility and a bit of options you have.
Suzana Popovic-Montag: We also talked about maintenance funds in the past where, you know, you could set up a fund to maintain the property during the lifetime of the beneficiaries. And you can actually set this out in your Will itself or perhaps even deem in your Will the fact that the beneficiaries themselves are going to be responsible for paying for the maintenance and the upkeep of the cottage property.
Ian Hull: And also to supplement that idea as well, you could talk about putting together some sort of co…like we talked about earlier, these co-tenancy agreements or this co-sharing agreement or however you want to call it. Sometimes we use the terminology more friendly.
Suzana Popovic-Montag: And again, in these circumstances, maybe trying to decide how to deal with it, you’d probably want to speak to your lawyer just to make sure that any arrangement you put in place doesn’t have some unforeseen tax consequence to it that you wouldn’t otherwise have expected.
Ian Hull: One, certainly one advantage of this testamentary trust, other than the flexibility we talked about, as opposed to the inter vivos, that’s the during the lifetime trust, is that if you do set up an investment fund for the maintenance costs and so forth, the income from the investment will be taxed at graduated rates. Like for individuals, what we all are taxed at, instead of at what, in an inter vivos or a lifetime trust is at the highest marginal rate. So there is a little tax spread there that you may want to consider if you’re creating these investment pool.
Suzana Popovic-Montag: And similarly, if the trustees sell the property and then tax is payable by the estate, the capital gain in that circumstance would be taxed at this graduated rate as well, so a further advantage to that.
Ian Hull: So like the living trust or the lifetime trust that we’ve talked about, the property in the testamentary trust, though, is deemed to be sold every 21 years for capital gains tax purposes.
Suzana Popovic-Montag: But in those circumstances, a roll out of the trust property to the beneficiaries at cost before the 21 years are up should still be available though.
Ian Hull: So we have some creative tools that when that, we talked about earlier, that date of division comes, and certainly if you want to hand these properties on from generation to generation, there are some tax, I guess what we’d call is outlet passes, some flexibility that you’re not going to have to sell the property just to pay the tax.
So, let’s talk a little bit about how we would create an agreement that really does work for everyone.
Suzana Popovic-Montag: Ian, whether your beneficiaries own the property outright or they have the right to enjoy it through the use of a trust, putting any agreement in place and clearly setting out the terms for the use and the maintenance, the repair, or how you’re going to improve the vacation property, is really key to avoiding these disputes that we foreshadowed or talked about in the past. Especially when, you know, many people or multiple people have an interest in the property.
Ian Hull: So instead of just talking about this esoteric idea, the idea of putting an agreement in writing, it might be worthwhile flushing out some of the important elements that you’ll want to include in the terms of this co-ownership agreement or trust structure. There’s various ways you can document it in the form of putting it in the terms of the trust itself. You could have a separate agreement. It’s much like, and a good analogy would be, a shareholder’s agreement where you’ve got a group of shareholders sitting around the table in a privately held company and you want to make sure that people don’t tear each other’s throats out over issues. Well, you set up a mechanism. And that’s all we’re going here. So let’s try to flush out some of those, and we may run out of time today, but let’s start with some of the ideas of what we want to flush out in this agreement and we can maybe work through the next podcast some more detail.
Suzana Popovic-Montag: I think that setting up a fund to actually maintain the cottage property is one of the key things you want to keep in mind.
Ian Hull: And this fund can come from contributing to a trust, or setting aside a portion of an estate under the terms of the Will. Those are, there are lots of funding opportunities. Another option is as well, to buy a separate insurance policy just for that purpose. There’s lots of creative ways to create which is really the glue of this. I mean, I would say the agreement is probably the true glue but this is the underpinning. Nothing saves a recreational property like funding. And if the funding mechanism is created to support it, the ownership in a co-ownership arrangement is often held together in so much less turmoil.
Suzana Popovic-Montag: And an interesting thing to keep in mind is that that fund that we are talking about can be held in trust even though the vacation property or the cottage property itself isn’t. Or the fund could be invested in the names of even the co-owners.
Ian Hull: So just in terms of wrapping up this first element of creating this agreement, I think there’s, you know, this flexibility that we can work within the agreement and good drafting and thoughtful consideration to this. And it’s so important and this is the perfect example. There’s a hybrid. We may not even put the vacation property. We may outright gift it. We may go back to that idea of tenants-in-common we talked about earlier. Give it a third, a third, a third outright to the kids, the adult children, and then throw some money into a trust that is called the cottage maintenance trust. Fund it through an insurance policy and you can know that hopefully the cottage will pass on without one of the main elements of dispute being surfacing and that is, of course, who’s gonna pay for the dock, who’s gonna pay for the repair to the roof and those sorts of things. And, you know, there’s always a fight over, well so and so uses it more than so and so and there’s all of that kind of debate. And if you have a fund paying it, it takes the sting out of the ongoing maintenance.
Suzana Popovic-Montag: Well, thank you very much Ian. I think we’ll follow up with some more thoughts on this issue during our next podcast.
Ian Hull: Thanks Suzana.
You’ve been listening to Hull on Estate and Succession Planning with Ian Hull and Suzana Popovic-Montag. The podcast you have been listening to has been provided as an information service. It is a summary of current legal issues in estates and estate planning. It is not legal advice and you are reminded to always talk with a legal professional regarding your specific circumstances.
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