Category: GlobalTV MoneyWise

EstateWISE – Succession of a family cottage or cabin

One of the great concerns of aging parents who own a cottage or cabin that has been in the family for years or even generations is that it will have to be sold when they die?  Are there other alternatives?

Why is there this concern that a cottage will have to be sold?

  • A cottage is a capital asset, and unless it is a couple’s principal residence, its growth will result in capital gains tax when it is sold — unfortunately, a sale is deemed to occur when a person dies 
  • You can delay that capital gains tax by rolling over the cottage to a spouse — during lifetime or at death — but on the surviving spouse’s death, the capital gains tax must be paid
  • Given the positive trend in recreational property values across the country, there may not be enough liquid estate assets to pay the tax and therefore the cottage itself may need to be sold to pay the tax

If this tax is unavoidable then is there anything that can be done to alleviate the problem?

  • The main thing here is to be aware that there will be a tax hit coming
  • Some people simply set aside liquid investments to pay the tax at death
  • It may be possible for the beneficiaries to mortgage the cottage to pay the taxes, and the current owner may be able to facilitate that with perhaps a standing un-drawn line of credit on the cottage
  • Alternatively you might arrange life insurance — possibly with premiums paid by the adult children —  with the insurance proceeds paid at the second spouse’s death when the tax arises 

Aren’t there new trusts that were brought in to help with estate planning?

  • Probate planning trusts have been allowed under the Income Tax Act since the late 1990s
  • Those over 65 might transfer the cottage into a joint partner trust without there being a taxable disposition, and this arrangement will avoid the probate tax of as much as 1.5%
  • Unfortunately, this type of trust is deemed to dispose of its property at the death of the second spouse at which time the capital gains tax will have to be paid

Why not keep it simple then and transfer into joint ownership with an adult child?

  • For estate planning purposes, joint ownership provides the benefit of allowing the cottage to devolve outside of the estate, and thereby avoid probate tax
  • Unfortunately once again, adding anyone other than a spouse is a disposition for capital gains tax purposes — in effect you pay part of the capital gains tax now, and pay another part at each death
  • As well, if the child dies first then you are back at square one, and there are other concerns about exposure to creditors and matrimonial law considerations

EstateWISE – Joint ownership

We often hear of a couple owning their home “jointly”, but what does that really mean, and is it always the best way for people to own property?

What are the usual alternatives for groups of people to own property?

  • Two common forms: Joint ownership and Ownership-in-common
  • Under joint ownership, 
    • Members of the ownership group hold an undivided equal interest in the entire property
    • Generally owners cannot sell or transfer their interests without the agreement of all others
    • At a death, continuing ownership flows to the living owners by ‘right-of-survivorship’ 
  • Under ownership-in-common
    • You could have equal or unequal ownership proportions
    • Interests may be transferable as of right,  though owners could agree otherwise beforehand
    • At a death, the deceased’s interest falls into his/her estate to be governed by his/her Will

So why would couples prefer to use joint ownership for their homes?

  • It simplifies the estate administration process because you don’t have to refer to a Will (or resort to an intestacy application), or usually be worried about a challenge from a would-be estate beneficiary
  • Because it passes outside the estate, it is not subject to probate taxes, and usually it will also be outside the reach of any estate creditors

In comparison then, when might ownership-in-common be the mode of choice?

  • Where business partners own rental property, they will normally want those business interests to go to their own spouses and families
  • Those in second marriages may want to assure that their property remains along blood lines 
  • And even for first marriage spouses with substantial wealth, there may be tax planning reasons for using common ownership as part of a broader estate plan

Does this discussion only apply to real estate?

  • Real estate is the most often discussed type of property, but in principle any property can be owned by more than one person, and these are the two ways that it is most often carried out
  • Of course, for real estate and financial accounts, there are formal records of ownership, but for other properties you need to be careful how you keep your own records so you can prove the arrangement in future if called to do so

EstateWISE – Revoking a Will

As important as a Will is to put in place, a change in a person’s circumstance may give rise to a desire or a need to revoke an existing Will, or may even force an involuntary revocation as a matter of law.

Just to frame things up, why would someone revoke a Will?

  • Apart from just changing your mind, we can put it into a few broad categories 
    • You personally have undergone a marital change, asset growth, change in health status
    • A beneficiary, executor or trustee has died, become incapable, reached age of majority, etc.
    • Change in the law that has caused you to revisit your estate planning needs

So dealing first with a voluntary situation, how can a person revoke a Will?

  • This may vary a bit by jurisdiction, there are generally three ways to do it
    • Execute a valid new Will, which then supersedes the prior Will
    • Make a written declaration revoking the Will in compliance with any statutory requirements
    • Physically destroy the Will or direct someone else to do so — with the intention of revoking
  • Remember that a person must have the requisite mental capacity to revoke a Will.

What about these circumstances that may ‘force’ a revocation?

  • Generally we are talking about marital situations
  • When a person marries, any existing will is entirely revoked
    • There is an exception for Wills that are made in contemplation of marriage to a particular person at a particular time, and this should all be stated in the Will.
  • When a person becomes divorced, a Will is not revoked but rather it is read as if the spouse had predeceased the testator.
    • A separation is not sufficient; it must be a final divorce, though commonly under a separation agreement (assuming there is one), spouses give up entitlement to the other’s estate.
  • There is no automatic revocation upon entering or leaving a common law relationship, no matter how long-lasting that relationship.

Does a Will revocation affect any other aspects of a person’s financial affairs?

  • Insurance, RRSP and RRIF plan designations that are made directly with a financial institution are not automatically revoked by a marriage or divorce.
  • However, where a beneficiary designation is clearly stated in a Will, the designation is revoked when the Will is revoked by whatever means
  • For certainty, a copy of the Will should be deposited with the relevant institution