Everybody loves spending time with their loved ones at a family cottage or vacation property, creating memories that will last a lifetime. Often, the intention is to pass this property down to your family so that these special moments can continue for generations to come. To do this, many people list their children’s name on the land title, believing it will simplify the process of leaving their children with a thoughtful legacy. Instead, recreational property owners who have their children’s names listed on the land title are leaving a financial and emotional landmine for their families.
The first issue arises with the judicial system because a jointly owned title is no longer considered legally viable within the courts. Additionally, if your children divorce their spouses, a portion of the properties value may be owed to their ex-spouse. Thirdly, having your child’s name on a recreational property’s land title in addition to their primary home may result in additional tax liability for both parties. Lastly, if something were to happen to your child, to hinder or shorten their life, you may owe their estate their share of the cottage’s value.
Fortunately, there is a strategic way to ensure future generations will be lounging on the dock or roasting marshmallows by the fire at the family cottage. By putting your cottage, cabin or vacation home into a trust you may resolve some of the risks.
A trust is a private legal entity that owns the asset on behalf of a beneficiary. All assets in trust are held privately. So if a beneficiary declared bankruptcy, went through a divorce or was sued, the cottage would remain protected. While relatively new in Canada, trusts have been used in England for centuries, and have provided security to residents of the United States for more than 150 years.
Trusts are a phenomenal tool that are customizable making it easy to meet the needs of your unique goals and requirements. Customizing a trust enables property owners to spell out its exact terms, including whether a child can ever sell the cottage and how it will be used by family members. Trusts can also be revised, similar to wills.
Trusts offer a remarkable amount of benefits. As the author of your trust, you can design disaster clauses within it for any imaginable scenario you can think of. Also, unlike a will, any assets held within trust will not go through the court process of probate saving your family time, money and stress. This is because trusts never die.
Another issue that arises when succeeding recreational property is taxation liability which can hinder the smooth succession of your family’s vacation home. By using an estate freeze alongside a trust, taxable capital gains can be strategically deferred. Once a cottage is put into an estate freeze, any future growth on the asset’s value is transferred automatically to the next generation. As a result, a family cottage will be succeeded to heirs in the most tax efficient manner available.
With the right tools and knowledge, recreational property owners can prevent future family discord or excessive taxation. While some legal and tax professionals may still be advising cottage owners to add their child’s name to the property’s land title, it is advised that you use more effective estate planning methods with the assistance of an estate planning expert. By proactively planning your estate, recreational property owners will secure peace of mind for themselves and future harmony for their families.
