Passing on the Family Cabin

Wiegers Financial & Benefits is one of the largest private financial planning and employee benefits consulting firms in Saskatchewan. Our Financial Planning Division provides business owners, individuals and families with expert investment and insurance planning services to help them reach their long-term financial goals. We also have a Group benefits division. In our latest news, Colton Wiegers explains the personal, legal, and tax implications of passing on the family cabin.

Family cabins serve as amazing memory makers for your family, but it also come with many responsibilities. 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 to your children.

Personal Considerations

There are many personal ‘what if’ scenarios to consider before passing the family cabin to the next generation:

• 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 inheritors?
• How do you decide on major repairs or renovations?
• What happens if one child divorces, declares bankruptcy, or dies?
• How do you divvy up time or use of the cabin among your children?

Each family situation is different, so starting the succession planning conversation early with all involved parties is wise. Once the decision to keep or sell the family cabin has been made, address the legal and tax requirements.

Capital Gains Tax

Many people know that their primary residence is exempt from capital gains tax. However, a second property, such as a cabin, is not. 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. Seek professional tax advice before 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.

Parents holding the family cabin in joint tenancy might consider adding their children to the title. If one parent passes, the surviving parent takes full ownership without probate. However, adding children as joint tenants exposes 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

Determine how the cabin 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?
• What happens if one child cannot afford their share or cannot acquire a mortgage?
• How will the estate be equalized if not all children want the cabin?

Life insurance can play a significant role in managing the financial aspects of the cabin transfer. It could be taken out on the parents’ lives, with premiums paid by the children or parents. The proceeds could cover any capital gains and property transfer tax or buy out the cabin from the remaining children, providing a practical and effective solution.

Cabin ownership is common, and so is the transfer of ownership to younger generations. If the transfer isn’t handled properly, significant and costly tax implications can arise. Colton Wiegers tells us more.