Transferring the Family Cottage - Part 7 - Hull on Estate and Succession Planning #175
Listen to: Transferring the Family Cottage - Part 7 - Hull on Estates and Succession Planning #175
This week on Hull on Estate and Succession Planning, Ian and Suzana recap their cottage series and discuss the possibilities that may arise with the beneficiaries, such as disinterest in the property or incapacitation.
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Transferring the Family Cottage – Part 7 - Hull on Estate and Succession Planning #175
Welcome to
Suzana Popovic-Montag: Hi and welcome to Hull on Estate and Succession Planning. You’re listening to episode 175 of our podcast on Tuesday, August 4, 2009.
Ian Hull: Hi Suzana.
Suzana Popovic-Montag: Hi there Ian. How are you today?
Ian Hull: Terrific, thanks. And yourself?
Suzana Popovic-Montag: Very good thanks.
Ian Hull: Awesome. Okay, well this is going to be our last podcast so we’re in the middle of summer now and it’s going to be our last podcast on the family cottage. And we’ve talked about and tried to and we’re proud of our brochure “Plan Ahead” and we’re really sort of trying to talk about some of the issues that are in that and we recommend you take a look at that. But also recommend you get good advice on this whole transition of the cottage. Property or the recreational property.
What we’ve discussed in the past in this mini series is having (a) discussion with the heirs. And talk to the people who are going to get the properties. We talked a little bit about some of the tax consequences in the kind of core funding mechanisms for the tax hit that’s going to come on your death and we talked about some ways to manage that hit and talked about a little bit of some of the options available to the parents who are going to pass down the property in the form of the gifting, giving options of selling the property of course and then we touched on a living trust or the inter vivos trust.
We also talked about transfers on death. So we talked about how we could do it during lifetime and then we talked about what’s going to happen on death and some of the options available there, which include joint tenancy and gift by Wills and so forth. And then we talked really and what we want to finish up today is, creating an agreement or a trust document, talk about some of the meat and potatoes of what’s going to be in that document or agreement to make this work. Because all the talk in the world isn’t going to save the transfer unless you document it. You have good discussions and you document it. So people leave with a plan of action.
We talked in the last podcast a little bit about the last point was that, you know, what do we do when someone, a co-tenant or a beneficiary dies? And make sure that our agreements or trusts accommodate that scenario. And the last three things we want to cover today, the first of which is another scenario that needs to be covered in terms of the ownership and …
Suzana Popovic-Montag: If someone were suddenly to become incapable of using the property, whether they’re a co-owner or the only owner, what happens in those situations and how can you plan for that in advance.
Ian Hull: And, you know, nobody wants to talk about death but people at least consider incapacity as an option. And that can include the parent, obviously if they’re still in the pool of ownership but most importantly, if it goes down to that next generation, what happens with that generation if one of them becomes incapable? And what is going to be…I mean come back to all of this agreement. How are we going to…we talked about default before. Well they’re going to default.
Suzana Popovic-Montag: Right.
Ian Hull: Right? And is that person ready to either fund it through their own new, you know, whatever insurance money they might get on incapacity or something like that? Or are they going to be out of the loop? Are they gone?
Suzana Popovic-Montag: And it really is a two-fold consideration too. One is, of course, the possibility that they might stop using the property. And the secondly is these contractual expenses or obligations that they’ve incurred as a result of being in either a trust or a contractual arrangement.
Ian Hull: Absolutely. So that’s just another factor in how we want to structure our deal and make sure we’ve checked that box off.
Suzana Popovic-Montag: That’s right.
Ian Hull: The next box to check off is just sort of simplifying it, make sure that the terms are clear, that if you want to sell your interest. So it goes down to the 3 kids and what do they do if one of the interests wants to sell?
Suzana Popovic-Montag: And we’ve seen a lot of creativity that can arise in these situations. You might have the option being put to the other owners of the property, like a first right of refusal to purchase the property. You have to, of course, consider things like at what value that sale or that transfer will take place and again, a funding mechanism possibly as well. Like, how is that individual going to be able to extricate themselves from it? How quickly, over what period of time and what are perhaps again the tax consequences of that kind of an arrangement as well?
Ian Hull: Well that’s interesting. I mean, that point kind of encapsulates a lot of what we’ve talked about.
Suzana Popovic-Montag: That’s right.
Ian Hull: And, you know, you combined two things pretty easily there; incapacity could happen and the sale of interest would immediately follow because that incapable beneficiary can no longer maintain it.
Suzana Popovic-Montag: That’s right.
Ian Hull: And do we…have we addressed that? And these aren’t sort of entirely improbable scenarios. These are scenarios that, although we see it day-to-day, they’re things that happen in life. And if we’re not ready for them, they create trouble.
Suzana Popovic-Montag: That’s right.
Ian Hull: Alright. And again, all documenting doesn’t solve every problem, it certainly goes a long way to solving the problem.
Suzana Popovic-Montag: That’s right.
Ian Hull: Communicating that documentation helps close the loop entirely.
Alright, the last thing that we were talking about, again not to be too negative, we want to end on an up beat in the whole cottage property and the fact that this can happen, it can work and often does if done properly. But again, let’s keep our eye on the ball in terms of scenarios that could happen and that is, in troubled times, what happens if one of the beneficiaries goes bankrupt?
Suzana Popovic-Montag: That’s right. And again, not things you want to think about but it’s definitely something that’s better that you plan for or at least turn your mind to before, rather than when it’s too late.
Ian Hull: Yeah, because then you’re going to get a third party involved, the trustee in bankruptcy, for your brother who has been not so good with his money or has gone through a terrible time with his business or something. And all of a sudden you’re at the table with a new partner. And what ways are there, if any, can we deal with that? And that’s where you get into…and we’ve talked about some of the benefits of co-ownership and co-tenancy. Well that’s where you really get into some benefits with trusts.
Suzana Popovic-Montag: That’s right.
Ian Hull: Right? And so the trust scenario is much more protective typically in that scenario of a bankruptcy. So, you know, maybe it is, you eyeball the situation and think well, you know what, bankruptcy is a lot more likely here or possible. Say this person is a high flyer and they’re doing up and down entrepreneur things and doing deals all the time and they may be exposed to the up’s and the down’s and maybe they’re the kind of people you want to protect from bankruptcy and those kinds of things. Now trust doesn’t solve all the problems but it is a higher wall of defence to a third party bank coming in and all of a sudden, you’re on the dock with the Vice-President of the bank cause he owns a third of the cottage.
Suzana Popovic-Montag: It doesn’t even have to be that stark. An illustration could be, you know, a very disgruntled ex-wife or ex-husband.
Ian Hull: True.
Suzana Popovic-Montag: And again, if you can foresee these kinds of things, or at least think about them, then that might help in the planning process and which way you ultimately choose to go, or maybe just a hybrid. A hybrid of a little bit of everything that is really custom-built for the individual situation.
Ian Hull: Fair enough. I didn’t want to go quite that dark…I’m just kidding. That scenario is a very important one and one that, you know, again the key really is, what steps can we take, if any, to keep third parties out of this? Because we’ve tried to pass it down to the next generation and we don’t need the extra pressures of third parties coming into that level of ownership if we can help it. And it’s not easily done, but it is done by buy-outs and all the sorts of things that you’re suggesting. So it can be accommodated, can be considered in terms of…at the outset. Again, you know, unfortunately we’re in the business of predicting bad things as well as good things. And those are the scenarios.
Alright, well I think that sort of covers our thinking in terms of what we wanted to cover and walk through in terms of the whole cottage or recreational property transfer. It is only the middle of the summer so our mini series, our next mini series will deal with something that is summery but we can’t tell anyone yet because we haven’t totally locked it down. We’re still talking to our agents about it.
Suzana Popovic-Montag: Nothing like a teaser to end our mini series on the cottage arrangement. Thank you very much Ian.
Ian Hull: Thanks very much Suzana.
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