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The Family Cottage
If you have had a cottage in the family for many years and want to keep it in the family for future generations, careful planning is essential.

Naturally their are many things to consider but the two that come up most is how do you deal with the future tax liability and what would be a viable option.

Dealing with a furture tax liability

As most cottages are not usually the principal residence of the owner, any transfer of ownership may result in substantial capital gains taxes. Let’s consider an example: a property with an adjusted cost base of $100,000 (in this example, the adjusted cost base is the price that was originally paid for the cottage). The cottage is now valued at $400,000. Such a value increase would not be unusual in today’s real estate market. In this example, the capital gain is $300,000 of which half, or $150,000, is subject to income tax.

When the owner of this cottage passes away, the estate must pay this tax. The question is: will the estate be able to absorb the expense without the cottage having to be sold? Transferring ownership to children before death does not avoid the liability, since the tax rules say only transfers to a spouse can be made tax-free.

Insurance can be an effective solution

As we saw from the above, the tax liability could be substantial and there may not be liquid resources readily available from the estate of the deceased. Insurance could be one solution. A policy with a death benefit equal to the expected tax bill can provide the cash for this expense. The proceeds will normally flow to the beneficiary(s) tax-free and will also avoid probate fees. What many families do is have the insurance premiums shared by the beneficiaries.

Getting Advice

Passing on a cottage can be a complex matter and structuring the effective transfer deserves your detailed attention. Every family situation is different and it is important to assess your own case carefully. Don’t assume that your situation is not significant or that your family members will never fight over your assets. Discuss your situation beforehand with your family members and seek advice from experienced estate planners and other professionals whom you trust.

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