Transferring the Family Cottage - Part 6 - Hull on Estate and Succession Planning #174
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Transferring the Family Cottage - Part 6 - Hull on Estate and Succession Planning #174
This week on Hull on Estate and Succession Planning, Ian and Suzana continue their discussion about the best practices for transferring the family cottage to the next generation while addressing the issue of defaulting on a trust or contract that was previously agreed upon by all beneficiaries.
If you have any comments, send us an email at hullandhull@gmail.com or leave a comment on our blog.
Welcome to
Suzana Popovic-Montag: Hi and welcome to
Ian Hull: Hi Suzana.
Suzana Popovic-Montag: Hi there Ian.
Ian Hull: How are you?
Suzana Popovic-Montag: Fine thank you. And you?
Ian Hull: I’m fine.
Suzana Popovic-Montag: That’s great.
Ian Hull: Do you want to talk a bit? Do you want to…
Suzana Popovic-Montag: Talk about feelings? Is that what you’re getting at?
Ian Hull: Exactly.
Suzana Popovic-Montag: No, it’s okay.
Ian Hull: I’ve taken a lot of criticism from the blogosphere about my inability to communicate with you. All I can do is present - I can’t communicate.
Okay, so let’s keep working through this because on the sunny days of summer, we have an agreement that we’ve been walking through. We talked a little bit about this idea that we’ll take a…let’s document the plan of action. How are we going to transfer it down to the next generation, not just throw it at them and say, you figure it out? Let’s help them, walk them through and hold their hand a little bit. And part of the way we do it is either we set up a trust, or we set up a co-ownership or a co-tenancy agreement or something like that. It’s trust law or contract law. We talked about that in our last podcast.
Now in this podcast, we ended up our last podcast talking about the importance of creating a decision-making process. And again, it’s easier to do as you said in our last podcast, in a kind of a contract environment. But once we’ve created the decision-making process and we talked about some of the options. Majority rules; semi-majority; 75% vote has to have a decision. If you’re going to put a new roof on the cottage, 2/3rds of the ownership has to agree. I don’t know, the capital expenses. You can categorize a lot of these and good drafters can pick up on issues that you can identify.
Suzana Popovic-Montag: Right.
Ian Hull: So the decision-making process, while there’s lots of choices, it’s something that shouldn’t be overlooked. Because we’ve got a pool of money that we’ve created, hopefully, or a funding mechanism. Now we’ve got a decision-making process. And then the next thing we want to talk about and what is sort of a classic problem is scheduling of the use of the property.
Suzana Popovic-Montag: And that really is one of the flashpoints, I’d say, particularly in the best weather and the best season when the cottage is most demanded by the family members or the individuals who are going to be sharing it. And so some mechanism really does have to be put into place. And documented because it’s easy to try to avoid the flexibility of the arrangement, but not necessarily something that’s easy to deal with emotionally.
Ian Hull: Absolutely. And you know, where you learn a little bit of the sophistication of these agreements is when you look at, in Ontario a big trend in the past 10 years has been partial ownership or sort of almost time-share ownership of cottage properties. And those corporations have developed some pretty sophisticated schemes as to who gets what weeks and so on. But what some of them that I was looking into before this podcast, one of them gives the purchaser guaranteed 5 weeks’ use of the cottage for a year; 2 weeks in the summer and then they get into this scheduling program that it’s first come, first serve.
Suzana Popovic-Montag: Right.
Ian Hull: I mean, we can get that elaborate. That’s sort of one end of the scale. The other end of the scale is as we set out in our brochures, like, you know what, maybe every year at the beginning of the year you draw straws. I mean that’s an unsophisticated way of dealing with it. And then you pick weeks. You have to be sensitive to the fact that some people always get their holidays during the second week of July or something and maybe that’s got to be accommodated. But, like you say, it’s got to be…it should be anyway…we always recommend it be documented in some way, even if it’s a process as opposed to anything else. With good communication, you can help avoid some tension and choices and so on.
Suzana Popovic-Montag: That’s for sure.
Ian Hull: So that’s just another sort of cornerstone. And what we’re trying to do in this series is just hit the hot button items, throw some examples of what we’ve seen that work in these agreements, and make sure that, you know, it gets people something to think about.
Alright, so those are all the happy things and we’re going to all agree on what dates we’re going to go up and so forth. But what about the negatives? And that is, what about the consequences of default?
Suzana Popovic-Montag: And when you say default, Ian, I’m presuming you mean if there’s an agreement that’s been put in place, whether it’s a trust arrangement or a contractual one, you’ve agreed to certain things. And now you’re not upholding your end of the bargain, is that what you’re getting at?
Ian Hull: Well exactly. If you’ve come up with a scheme of a plan of action and one of the parties isn’t paying their funding portion. Or someone isn’t prepared to accommodate the choice of weeks’ process that you’ve…
Suzana Popovic-Montag: You’re not getting into trespass law, are you, cause that’s way out of our league.
Ian Hull: Yeah, no, that would not be my strength for sure. But, and again, it comes back to what you said before. In a trust environment, it’s more difficult to deal with this issue. But in a contract, co-ownership, co-tenancy agreement, and we’re not sort of pushing that because the trust brings with it its own protections and the co-tenancy agreement brings its own protections. But you can see the flexibility is more limited with a trust environment because if a beneficiary defaults, you don’t have the same sort of ability to basically kick them out.
Suzana Popovic-Montag: That’s right.
Ian Hull: As easily, anyway.
Suzana Popovic-Montag: Or to seek some kind of remedy from a judge. It’s a little bit more…certainly I would say judges would be a bit more reluctant to interfere with a trust-like arrangement unless it’s the trustee who’s necessarily, you know, acting improperly than in the contractual arrangement amongst family members where, you know, they’re sort of governed by this is what you have to do.
Ian Hull: Absolutely. So I think the real message with this is that the agreement should include strong default clauses and steps that everybody can agree to before a default occurs.
Suzana Popovic-Montag: Right.
Ian Hull: Because what happens in a lot of these…again, I mean if you look at the hot button issues of why these transfers to the next generation don’t work, one of them is that people build up and stew about the fact that Betty didn’t put in her two grand this year. And everyone else had to put in an extra, while Betty’s going through a tough time. But there was no consequence. There was no…I mean even if, for example, someone couldn’t fund it because they ran into an unemployment situation where they didn’t have any money to pay for it or something, you can always say well look, you don’t lose your interest in the property but it’s diminished by that amount. And so if you accumulate 5 or 6 years, maybe after a certain point in time you say that’s far enough, because the others can’t afford to carry it but you have lots of flexibility to say you know what, all it’s going to do is diminish what I’m ultimately going to get out of the property or something like that. If you can anticipate those kinds of scenarios where people know there’s a cause and effect.
Suzana Popovic-Montag: Right.
Ian Hull: Right? If they know the default consequences before they go into it, it helps again diffuse the situation.
Suzana Popovic-Montag: For sure. And we’ve seen in some interesting situations where people will build in, you know, either a family meeting kind of provision, a mini-arbitration, mini-mediation kind of provision if the people just can’t agree. They agree in advance that it will be, you know, ultimately resolved by someone other than a judge so that you don’t get into that kind of a contentious environment.
Ian Hull: And, you know, that’s absolutely right. I mean you can phase it in. You can sort of say alright majority could rule to make the decision without bringing any third parties in and if that doesn’t work, then you go to a mediation or arbitration. If that doesn’t work, then people can have their rights. You know, some of this seems a little elaborate and maybe bureaucratic but we come back to one of the themes that we can’t forget about family cottages, and that is, they are emotional property. They are not typically seen as just a cottage by most of the next generation and so people will go pretty far to maintain their interest if they really want to hang on to it.
Suzana Popovic-Montag: And like you said earlier, they might as well know what the consequences of not following through on what they’ve agreed to, would ultimately be.
Ian Hull: Absolutely. Alright, so we’ve got sort of that unhappy consequence of default aspect of any agreement. Let’s get unhappier and that is, what happens if one of the co-owners or a beneficiary dies? Once the transition is made, the property is in the hands of the next generation and then unfortunately that generation, someone dies.
Suzana Popovic-Montag: And I think there’s going to be two different sets of consequences and much more clearly delineated if you’ve got a trust arrangement or if you’ve got a contractual one.
Ian Hull: Absolutely. Again, you’re running into some of the complexities and so forth that get created in a trust arrangement and so forth. Alright, well on that happy note, let’s wind up for today’s podcast and really look forward to some of these scenarios. But we’ve got all of these different variables that we’re sort of trying to compact in and hopefully we’re going to come up with this wonderful agreement that’s going to eliminate all fights for the future and forever.
Suzana Popovic-Montag: That’s right.
Ian Hull: No pressure.
Suzana Popovic-Montag: And we’re out of business.
Ian Hull: That’s right. Alright, well thank you very much.
Suzana Popovic-Montag: Thanks Ian.
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