Having the tough conversations now could save your client's family a lot of stress and potential conflict later
With cottage prices increasing by 20% to 160% during the pandemic, one of Meridian’s senior financial planners is encouraging cottage-owners to have the succession talks with their families now to ensure a happier cottage succession later.
“Everything’s been amplified in the last two years,” says Justin Fraser, who serves Barrie, Ontario’s three Meridian credit unions. “If you’re holding a cottage when one spouse passes, it typically goes to the next spouse. But, if it goes to the next generation, they will have to pay the taxes. If they don’t have that ability, they may have to sell the cottage.”
Some Niagara, Ontario waterfront cottage prices have recently increased from $500,000 to $1.3 million, which means a family might have to pay taxes on a $400,000 gain. If a family wants to keep its cottage in the family – and not all do – it may need to plan how it can afford to do that.
The secret is having that tough discussion now about what happens to the cottage – which may now be the parents’ primary residence – when they die because recent price increases have made it a more valuable asset with more taxes due on succession.
“I would say 90% of people don’t have this discussion,” says Fraser, “and it’s scary how fast a health issue can change the situation. A lot of people put their heads in the sand and think that the kids will figure it out when the time comes. But, that’s where we see the most conflict, costs, and ugliness: when it’s not’s thought out ahead of time.”
Fraser has a four-point plan to help financial advisors navigate these rocky shoals.
1. Hold a family meeting
“The biggest thing is to have a family meeting ahead of time and discuss that ugly word ‘death’ that we all try to avoid,” he says.
If that makes clients, or their families, uncomfortable, they can ask their financial planner or lawyer to join them and guide the discussion.
“Death can be a hard thing to talk about,” he says, “but having someone there to guide the conversation will help.
2. Find out what the family wants
Passing on the family cottage, with all the memories, can be an emotional as much as financial issue.
“Put it on the table and ask your family: do you want the cottage?” advises Fraser. “If you do, can you afford to pay the taxes and on-going maintenance? The cottage is a home. Rooves need to be replaced. Docks need to be put in and out, and replaced, too.”
When they do that, some of Fraser’s older clients are surprised that their adult children don’t want it. Given the increase in cottage country traffic, they don’t want to drive hours from a city like Toronto, then upkeep a second place.
3. Ensure the support structure
If the adult children do want the cottage, the family needs to have a frank discussion about whether they can afford it – especially the maintenance and taxes when it changes hands – or whether the parents can support that with their estate pre-planning.
Fraser says there are options, such as a joint life insurance policy, so that when the last person dies, the policy can help to pay the potential taxes and maintenance. RRSPs can also go to the estate rather than beneficiaries. Parents can also leave their assets in trust for cottage maintenance.
“If the trust owns the cottage, that keeps the fights between the kids at bay,” says Fraser.
4. Consider the taxes
The biggest thing for the potential owners to consider is what the taxes will be for today and tomorrow, as well as their own personal taxes.
“If something happens today, what would the tax be? As the cottage price increases, what’s the best way to financially manage it?” says Fraser.
Parents can transfer the ownership ahead of time, so the new owners can avoid higher taxes later and also save the 1.5% probate costs. The downside of that is that the children will have to pay the taxes then, not later. They also run the risk of the property being a vulnerable asset if they divorce, go bankrupt, or are sued.
Doing some estate pre-planning can help families achieve what everyone wants – whether it’s keeping or selling the property. The last thing that Fraser wants to see is people being forced to sell something that’s important to them in order to pay the taxes or stop a family conflict.
“The biggest thing is to have that family conversation,” he says. “There are many options if you think about this ahead of time.”