There is no easy way to simply give the cottage to your children at least not where the government is concerned. Whenever there is a change of title on the property, including transferring it to your children, the property is treated as though it was sold at fair market value, and you (or your estate) are liable for the tax on the capital gains from the sale.

Given the value of today’s waterfront properties, the taxes, assuming it’s not your principal residence and therefor exempt from capital gains, can be enormous. What started off as a gift to your children could quickly become an enormous tax burden.

There are several ways to bequeath a property to your children. Once you’ve made the decision regarding who gets what, it’s best to meet with a lawyer and a tax specialist to determine the best solution for your family. The following options are from Douglas Hunter’s book, The Cottage Ownership Guide.

1. Simple Bequest - the property is left to the children in a will upon the owner’s death. This works best where there is minimal or no capital gains taxes to be incurred. The down side to this is the delay in transfer of title and the probate cost incurred during the probate period.

2. Gift the Cottage to Your Children Now - transfer the ownership of the cottage as a gift, either all at once or incrementally. While the change in ownership triggers immediate taxable gain based on fair market value, any additional capital gains won’t have to be paid until the recipients dispose of the property themselves. Parents need to secure a “life-interest” in the cottage, to be able to continue to have a legal right to use it and protect it from being sold.

3 . Sell the Cottage to the Children Now - If the parents are unable to pay the taxes or wish to free up capital to enjoy other pursuits this option secures the property for the children who want to hang onto it. Capital gains still have to be paid but it avoids probate costs. The cottage can also be sold incrementally to the kids to break up the annual capital gains burden.

4. Make Your Children Joint Tenants - You and your children each share an equal and undivided ownership of the cottage. The property is considered to have a single owner. As the original owner your rights become limited and capital gains are triggered. It does allow the property to be passed from directly to your joint tenants without paying probate fees.

5. Transfer the Cottage to a Living Trust (Inter Vivos) - You no longer own the cottage but have control and benefit from it. This is only available to person 65 years or older. There are no probate fees and no capital gains at the time the trust is created. However, it is more expensive to establish and maintain a trust than a simple bequest. A trust will provide a shelter from capital gains for a maximum of 21 years only.

6. Establish the Cottage as a Non-Profit Organization - This might be a good solution where there is a large property and many family members. Members pay dues similar to a club for access to the property. Successive generations can use the property without paying capital gains tax or probate fees. The initial transfer of the property will likely trigger a capital gain. There is also the ongoing expense of accounting fees.

If you would like more information on how to bequeath the cottage to your children Hunter’s book, The Cottage Ownership Guide, is an excellent, easy-to-read guide that explores the pros and cons of each option in greater detail. Peter Lillico’s website www.lbkglaw.com is another excellent online resource.

Cheers,

Julie

This entry was posted on Wednesday, March 26th, 2008 at 10:34 am and is filed under Real Estate. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.