As summer comes to a close, many of you might be trying to get one last trip out to the cabin as school starts, and the weather cools down. The family cabin is a cherished treasure that holds many delightful memories. As time passes, a new generation of memories will fill the cabin. However, what happens to the cabin upon your passing? While there may be desired inheritor/s of the cabin, there are many personal, legal, and tax implications of passing on the family cabin.
There are many personal ‘what if’ scenarios that need to be considered before the family cabin can be passed to the next generation. For example, what if only one child wants the cabin but cannot buy out the remaining children? Who pays for the regular upkeep of the cabin? Is it on a per use basis or spread equally among the inheritors? How do you decided on major repairs or renovations to the cabin? What happens if one child has a divorce, declares bankruptcy, or dies? How do you divvy up time or use of the cabin among your children?
Each family situation is different so it is wise to start the succession planning conversation early with all involved parties, even if you think there is no interest in the family cabin. Once the decision to keep or sell the family cabin has been made, you must next address the legal and tax requirements.
Many people know that their primary residence is exempt from capital gains tax. However, a second property (e.g. cabin) cannot also claim the capital gain tax. It is therefore advisable to consider the tax implications of both your primary residence and your cabin before using the capital gains exemption.
Consider the following: your primary residence was purchased for $200,000 and is now worth $400,000 (capital gain of $200,000); while the cabin was purchased for $50,000 and is now worth $350,000 (capital gain of $300,000). Assuming both properties were held during the same time period, it would be most advantageous to consider the cabin your primary residence for the capital gains exemption, as the tax liability will be higher.
There are many ways to pass on the family cabin to help minimize, or defer the tax liability, and it is therefore recommended that you seek professional tax advice prior to passing or selling the family cabin.
Probate Fees and Joint Tenancy
Probate is the process that grants the legal authority for your Executor to act on the will by reviewing and determining whether the will is valid and authentic. In Saskatchewan, the probate fee is $7 on every $1,000 of value passing through the estate. For example, if the cabin passes through your estate at a value of $350,000, this will generate a probate fee of $2,450.
While many individuals do not like the idea of probate, it should not be considered the be all and end all to avoid probate.
Consider the following: parents John and Jane are currently holding the family cabin as joint tenancy, and are considering adding their children, Jake, Jill, and Julia, on to the title. As it currently stands, if John or Jane were to pass, the surviving parent would not have to pay probate and would take full ownership on the cabin. If the children were added onto the title, and both parents passed, the cabin would bypass probate and go directly to the children.
However, by adding on the children as joint tenants, the parents will need to consider the possible loss of control of the cabin, and the fact that they are now exposing the cabin to the children’s creditors, including family law claims.
To understand more about Joint Tenancy and the reasons for or against it, consider reading the article Joint tenants with right of survivorship – An appropriate strategy?
Mortgage or Life Insurance
If it has been determined that the cabin will be passed to the next generation, the next step is determining how this will be financed. Will the cabin be passed on while the parents are alive or through the will? Will there be a sale at, or below, fair market value (which could cause a double taxation issue)? What happens if one child cannot afford his or her share, or cannot acquire a mortgage? How will your estate be equalized if not all of the children want the cabin?
If a mortgage is not the way the children or parents wish to proceed, life insurance could be taken out on the lives of the parents, with the children or parents paying the premiums. The life insurance proceeds could then either cover any capital gains and property transfer tax, or could be used to buy out the cabin from the remaining children who are not interested in the cabin.
Passing on the family cabin is an emotional decision with many moving parts. If you would like to keep the family cabin, we recommend that you speak with your financial advisor, lawyer and accountant about your options so the memories can continue with generations to come.
The opinions expressed are those of the author and may not necessarily reflect those of Manulife Securities Investment Services Inc.