We will call these Legacy Challenges:

Now let's look at possible scenarios with respect to the cottage succession. Let's assume all you do is stipulate in your will that the surviving spouse and after his/her death the children are to get the cottage in equal shares. The state of affairs upon succession to the children is as follows:

• • The Fair market Value of Cottage - $1,500,000 - providing each child with a gross equity in the cottage of $500,000.
  • Capital Gains Tax Liability - is triggered immediately. Using the above assumptions the tax liability to the estate is $333,000, (For this illustration we assumed $0 of ACB)
  • There are estate settlement cost relevant to the cottage of $22,000+ for taxes and fees; $15 to $20 thousand for executor and legal fees.

So the children have a cottage worth $1,500,000 and a capital gains tax liability to the government of $333,000 and another $50,000 or so for legal and executor fees. This would leave a net equity share for each child in the cottage of about $370,000 after the debts are paid.

If the intention is to have the children keep the cottage.

• • Where are the funds coming from to pay the debt or some $384,000?
  • Do the kids have the cash available?
  • Do they have equal credit worthiness to borrow the funds?
  • Do all three wish to keep the cottage, or
  • would one or more of them wish to have a net cash equity rather than a debt load?
  • Do you want any portion of the cottage to go to a spouse of one of your children?
  • Is there a choice?

On the other hand...

1. 1. John's Situation: We know that John already has his own cottage and would rather get the net cash equity.
   2. Jake is located on the coast is not likely get any use out of the cottage due to his location and would probably like a cash equity over a debt load.
   3. Sara would love the cottage, but can't see coming up with $736,000 to pay the debt liabilities and buy out the brothers. Then there is the issue of "Butch" the resident freeloader. He may have legal rights to a share of the cottage if Sara becomes a benefactor.

But these are just the tangible financial numbers. The real issue is the potential for disharmony among the children that can easily erupt over the resolution of the cottage, which is exactly the opposite to the intention by gifting the cottage. This potential for disharmony is far greater an issue than the math or the specific numbers. This potential for disharmony exists in various degrees regardless of how you plan to solve the financial hurdles of succession. In the simplest terms the financial hurdles always revolve around the need to have cash to pay debts, buy out other benefactors etc.

We will try to address some methods of succession strategy. Detailed discussion of any strategy is beyond the scope of this article but we will highlight then against the backdrop of the consequences of each strategy. In selecting one strategy over another, one of the important consideration is the personalities of your children and their likely adaptation to and consequential interaction with their siblings, given the strategy chosen. Be aware of

• • your children's personalities and
  • their historical interpersonal relationship.

Leaving decisions to their own devices may very well destroy the very "legacy of your family life" the cottage created. Here are some strategies:

• Passing the cottage on to the kids while you are still alive. - There are financial consequences as Capital Gains tax liability is triggered; and other costs emerge. You also lose control of the asset, partially or in total.
• Fractional ownership - If financial considerations of accepting the succession can be sorted out, and if all want the cottage; all live within close proximity of the cottage; all problems are not solved. Time sharing its use; the seasonal chore of who opens and closes the cottage are all potentials for discourse. The most trivial issues are often the most contentious. Leaving a mess for the next visitor, or agreeing on what is or isn't a mess; painting the cottage a psychedelic color can blow into unsustainable arrangements. Management companies can eliminate some of these issues but come with a cost.

If all want the cottage and financial liabilities are at issue, loans or liquidation of other assets may become options.

• Placing Cottage into a Trust - Can delay the capital gains tax liability but eventually the issue returns. The fractional ownership issues still exist with its potential consequences.
• Life Insurance to Create Cash when it's needed. - Sufficient life insurance can create necessary cash just when it is needed.

Let's look at Life insurance a little closer. Why life insurance? The benefit becomes payable just when the liabilities of the succession become an involuntary reality, at death. Some of the virtues of life insurance are:

• • Death proceeds of a life policy are tax free.
  • Life insurance is an asset like any other asset but without the tax, so it doesn't impact on the size of your estate for tax computation purposes.
  • Proceeds can be paid directly and confidentially to a designated beneficiary outside a will.
  • The payment is not subject to public scrutiny, or delays often associated with probating or challenging of a will.
  • The asset is purchased, and the cost is age, health and gender dependent. The younger, and healthier, the insured, the cheaper the cost of the asset. Often the need for life insurance begins at an early age, like the 20's as mortgage insurance or protecting the family income while raising children. Later in life the need may well still be there, just for different reasons, like cottage succession financing. So some of the life insurance could be some of this early purchased life contract no longer needed for family or mortgage protection; and some can be purchased at older ages.
  • The mathematics through a cost benefit analysis can establish if life insurance makes financial sense. Your analysis of the children's circumstances and the interpersonal relationship amongst them will determine the virtue of the utilization of life insurance over alternatives.

Your advisor, may be in a position to walk you through the process. If you don't have one, we can help you, We have kids, we have come across many situations and helped many struggle through the process.

The key to cottage succession is to have perspective. The cottage is a thing. It was a catalyst for the wonderful memories, but life goes on. Often trying to perpetuate a notion at the expense of logic can have tremendous negative consequences for the kids, financially and emotionally. When you have three vibrant children, some with spouses of their own, all wishing to emulate the success of the family life you fostered for them, its not hard to imagine that they may not see the same picture of the cottage on a go forward basis as you are trying to hold on to. So to maximize the options at succession time and to minimize the chance for discourse, it is most prudent to have as much ready cash as possible to deal with the financial hurdles to a smooth succession process. ~

The reality is that Canadian tax system taxes the growth in value of real estate. While the principal residence is exempt from capital gains tax in Canada  As such secondary property within a family unit attracts capital gains tax in Canada. Canada inheritance tax and Canada estate tax have been abolished but was replaced by the Canada Capital Gains Tax.

Succession planning addresses not only the financial consequences of succession but the real human emotional and psychological well being of the recipients of the gift.

The tax system is complicated. Your situation may be similar to many Canadians, it is probably unique to you and this combination begs for professional counselling on how to not only minimize the impact on your estate but how to effectively structure your affairs to accomplish that goal.

Have you set up your Pre-Paid Capital Gains Tax Account for the cottage and other appreciable assets with Canada Revenue Agency? If not, We can help with a smooth transition that takes into account the human factors as well as the financial practicalities.

If you would like more information, please feel free to get in touch for a free, no obligation

-- and additionally --

Check out the blog on the cottage dilemma, cited in "Capital Gains - On Appreciable Property"~