Keeping the Cottage in the Family A country place is a symbol of relaxation, continuity in life, and family harmony. But when the topic of ownership succession is raised, that lovely spot can be transformed into a source of stress, uncertainty and family strife Anthony Layton MBA, CIM August 2017 Keeping the Cottage in the Family | 1 Letter from Anthony Layton Cottage succession, along with other estate planning issues, is among my professional specialties. After decades of helping families confront and solve the cottage-succession problem, I decided to put pen to paper and document this knowledge. The result is Keeping the Cottage in the Family, a detailed review of everything a cottage owner should consider when contemplating what happens when it’s time to pass on the property to the next generation. A succession plan can only be produced with the help of seasoned professionals who are familiar with the many pitfalls common to this challenge. I would like to thank Tom Burpee, Morris Jacobson and Matthew Elder for sharing their considerable expertise in the preparation of this article. Sincerely, Anthony Layton MBA, CIM CEO and Portfolio Manager, PWL Capital Inc. Table of Contents A responsibility as well as a privilege .................... 6 The taxman must be paid, one way or another.............................................................. 12 Get a head start .................................................... 7 Owning through a trust ........................................ 12 Planning closer to the event................................... 8 Share-ownership agreements .............................. 13 The capital gains tax problem ............................... 9 Use of a nature conservancy .............................. 14 Use the exemption, or pay the tax? ...................... 9 Conclusion .......................................................... 14 A couple with two residences ................................ 11 Anthony Layton is a founding partner, Chairman, CEO and portfolio manager at PWL. Knowing that trust is essential to building strong relationships with his clients, he takes great care to understand their needs before providing comprehensive analyses and sound advice. His 35 years in wealth management have provided him with an in-depth knowledge of portfolio principles that he applies for the benefit of each of his clients. Since 1980, Tony has been committed to the establishment and growth of wealth management in Canada through independent and conflict-free financial services firms. Recently he has contributed to the establishment of GAIA (The Global Association of Independent Advisors), an international association of firms dedicated to fiduciary excellence. He is a past National Chairman of the Canadian Association of Financial Planners (CAFP, now Advocis). Tony volunteers his time and energy with a number of organizations, including McGill University’s Desautels Faculty of Management, the Nature Conservancy of Canada (NCC), the Hillside Tennis Club, and the Anglican Diocese. He enjoys spending weekends with his family at his cottage in the Laurentians and plays a very active role in the Lac Brulé Owners Association. Tony is also a material shareholder and a Director on the Board of Agile IP, a VoIP phone system provider. [email protected] www.pwlcapital.com/layton-guay Keeping the Cottage in the Family | 3 It’s a place full of good times and fond memories, but the fun often ends when deciding what to do with it after your death, or when you are unable to cope with it during your later years Determining the fate of the family • When a property should cottage, chalet or whatever you be transferred to the next call your second home represents generation perhaps your biggest estate- planning challenge. Much as you • How the property is valued for love weekends and vacations at transfer purposes the lake, ski chalet or the farm, determining who will eventually take • Determining capital gains tax over the place after you die or can no and how best to pay it longer look after it is likely to be an angst-ridden experience. • Using the principal residence designation for a second home We somehow believe in our hearts that things will work out and everyone • The benefits of trust ownership will continue to enjoy the cottage’s pleasures. But it’s a fact that parents • Shared ownership: How and children/heirs rarely give much to create a fair and flexible thought about what will happen to agreement the place until the situation becomes critical, either when mom and dad • Possible use of a nature no longer want or are able to use the conservancy place, or when the last parent dies. This report is intended to provide There are many issues to consider the necessary background that will when assessing a cottage property’s enable you to bring all relevant issues future, a task made all the more to the table when discussing the difficult by the fact no one situation is cottage situation with your family. It the same. There is no one-size-fits- also will allow for a more efficient and all solution. However, it is possible thorough communication with to identify typical situations and your financial planner. A planner a range of solutions. We will first experienced in cottage succession address the fundamental issue of and other estate planning matters is whether someone will actually want an invaluable partner in your quest – or be able – to take on the place, for a fair and solid solution. To this especially if various circumstances end, he or she will draw upon the have changed. Assuming the answer expertise of accounting and legal is yes, we’ll go on to examine: specialists in this area, co-ordinating what is actually a project that encompasses a range of financial and legal tools. Keeping the Cottage in the Family | 5 A responsibility as reasons of career or marriage. When well as a privilege “Leaving cash also avoids the place ceases to be a practical potential problems of children weekend destination, its overall not getting along, children appeal is diminished. separating, children with The first step is to ask your children unequal wealth – only some of Time: Retired parents have lots of or other heirs about their future whom can afford to own part time to look after the property; their commitment to the cottage. You’ll of the property – and children children normally do not. likely learn they all want to take it on, moving to the United States or have a piece of it. Or at least they after they become owner Marriage: Your daughter might think they do. [which would trigger new tax- love the place, but your son-in- planning challenges],” says law has a family cottage elsewhere A cottage is a flashpoint for emotions. Tom Burpee, an accountant or is strictly a city guy. Or it’s a The longer it’s been in the family, the specialized in taxation and matter of financial priority, where greater the attachment. Many of our estate planning. the spouse would prefer spending fondest memories of growing up are money on the primary residence at the cottage. It’s where we took Such potential developments can and accompanying lifestyle than on our first swimming strokes, where lead to a new round in the cottage- rebuilding boathouses or adding we learned to play Monopoly, where succession debate. insulation to the old family house’s we learned how to paddle a canoe attic. or hammer a nail, or where we first So before taking everyone’s wishes got on skis. It may also be where we at face value, here are some things Surroundings: There’s more spent a lot of time with our grand- to consider before moving forward: than one story of a once-peaceful parents. We want the cottage to lake now overrun with “personal be part of our lives forever, and our Wealth: The children as individuals watercraft” or an isolated farm now children’s too. may not be as wealthy as their crowded by mass development. In parents and grandparents. This recent years, some major lakes in But things can change, including could be due to less lucrative eastern Canada have been “closed” the cottage experience itself. In earnings or simply the result of family entirely to swimming and boating fact, you might find that real-world inheritance being watered down due to environmental concerns. In circumstances have reduced from one generation to the next. In short, the cottage experience might the property’s appeal to the next many cases, when push comes to not be what it used to be. generation. You and your offspring shove, heirs will recognize they need may have become so consumed an inheritance of cash, not property. New zoning restrictions: Changes by who gets the cottage that you to local laws and building codes haven’t stopped for a moment Ownership costs: Further may restrict how the property can to honestly evaluate everyone’s tightening the financial screws are be used going forward, which may interest in the place and the ability or skyrocketing property valuations deter others from wanting to take on commitment of one or more heirs to and accompanying tax increases. It the place. take it on. costs more to have a tree cut down or have a long driveway plowed. It’s amazing how one’s view of the In fact, you might find you don’t Plus it costs much more to gas up family cottage can change once a user actually have a cottage succession the car to get there, not to mention is forced to contemplate the specific problem. Cash proceeds from a sale running the motorboat. realities of becoming an owner. As are much easier to divvy up than a often is the case in our society today, piece of real estate. Proximity: It’s not unusual for one the reality check comes in the form or more children to move away for of money.