Whether you call it a cabin, a cottage, or a lodge, a family weekend retreat is often a prized possession. The trouble is that, once stripped of sentiment, vacation home ownership can camouflage a complex tangle of personal, legal, financial and tax issues that far too many families fail to appreciate. Yes, that vacation home is a sanctuary. But it can also be a source of troubling family discord.
While parents are alive, things generally get sorted. Kids – of whatever age – go along with what they want. But trouble can start when the parents– are no longer around.
So with summer in sight, we thought it might be a good idea to survey two sticky matters surrounding vacation home ownership: sharing the property and passing the property to future generations. Both can be complex and each one requires careful discussion:
1. The case for a sharing agreement
With shared usage comes the need to address some significant issues, such as access periods, the bringing of friends as guests and, if relevant, rental options when a child cannot use the home personally. A sharing agreement helps deal with these and other issues in advance, and in writing.
Logistics create friction. Once you’re gone, who will open and close the property, or hire someone to do it? Who is responsible for making sure the utility bills, municipal taxes and insurance premiums are paid on time? A sharing agreement can be a perfect who-does-what list and, in the event of disagreement, dispute resolution device.
Not all family members have equally deep pockets. When the septic system goes on the fritz, who pays? A sharing agreement can neutralize a negative family dynamic by making an agreed financial provision for unanticipated expenses. This might sound melodramatic now, but you never know what the future holds. That’s why it makes sense to consider a sharing agreement.
2. Transferring the property to future generations
This is where matters can get especially tricky and the implications of passing a family vacation home to future generations can be confusing. A trust may play a useful role in transferring a vacation property to future generations. The property could be put into a trust.
Alter ego and joint partner trusts are inter vivos trusts that are sometimes called “life interest trusts.” They are an option for those age 65 and over. If the property is put into such a trust, you and your spouse or common-law partner (the “life interest beneficiaries”) would still be able to enjoy the property. You would specify in the trust document who will receive any remaining trust capital after you (both) have passed away. This could include the property if it hadn’t been sold from the trust. The main advantage of these trusts is that, if they are properly structured, no tax is payable upon the transfer of the property into the trust. As a result, you can defer tax on any capital gains on the trust property until your death (and your spouse’s death, for a joint partner trust).
Estate administration or probate taxes are applied to the assets in your estate at your death. Consider whether establishing an inter vivos trust, which may help to avoid probate fees, makes sense in the context of your overall financial plan and objectives.
You could also leave the property in a trust in your will and provide a fund to maintain it for a certain period of time. You could also provide the trustee with instructions or discretion on how to deal with the property when the children are of a certain age or want to buy out others or be bought out.
Trusts may be useful in transferring a vacation property to future generations. But you need qualified counsel from tax and legal professionals before proceeding. There are emotional, financial, tax and legal issues at play here – and the preceding discussion is no more than an overview of some of the considerations for transferring a vacation home to the next generation.
The Michael Fahy Group, backed by the resources of CIBC Private Wealth Management, can help you with a plan for your unique situation. Please contact me for advice on your vacation property ownership and transition questions and concerns:
Michael Fahy, The Michael Fahy Group, CIBC Wood Gundy, 604 691-7207.