Ways to pass the cottage to the kids

If I could change anything about statutory holidays I would make it so that, on Groundhog Day, if you were to see your shadow, you'd be entitled to a long weekend somewhere warm for a couple days of golf. Father's Day, however, would remain exactly the same, except that it would be celebrated every month, and would give rise to an obligatory afternoon of watching some sporting event live.

Now, Victoria Day is a holiday I wouldn't change a bit. Each year we head up to the cottage to open the place for the season - a great tradition. The only thing about the cottage I'm not looking forward to is dealing with transferring it to the kids one day - it's a sensitive issue in many families. I'm going to share a few ideas that could make that planning easier.

TRANSFERS TODAY

The first thing to do is wrap your mind around whether you'd like to transfer the property to the kids or grandkids while you're alive, or after your death. The key advantages of making the transfer during your lifetime are these: You'll pass the tax bill on any future growth of the property to your heirs, which can defer that tax hit for many years, and you'll avoid probate fees on the value of the cottage if it's no longer part of your estate. In addition, you'll have the opportunity of seeing your heirs enjoy the ownership of the property, and perhaps take a role in ensuring the creation of an agreement designed to allow your heirs to all share use of the cottage.

Transferring the cottage today doesn't mean giving up control over or use of the place. It's possible to enter into an agreement guaranteeing access and specifying other conditions. You can also maintain control by the way you structure the ownership. Vendor take-back mortgages and family trusts can provide levels of control, for example.

Consider four options for a lifetime transfer. In each case, you'll be deemed to have sold the property at fair market value, so there could be tax to pay, although you may be able to use the principal residence exemption to shelter the transfer from tax.

Gift it to the kids.

Simply giving the property to the kids is one option. You're going to need a lawyer's help to decide whether joint owners should be "tenants in common" or "joint tenants with right of survivorship (JTWROS)." There can be problems with either form of joint ownership (some of which I wrote about last week), so advice is critical.

Sell it to the kids.

This may be your best option if you need the proceeds to support you in retirement. Your kids could find their own financing, or you could take back a mortgage on the property. Taking back a mortgage will allow you to defer the tax on the sale (to the extent the sale will be taxable to you) by allowing you to spread the tax liability over a period as long as five years by use of the capital gains reserve provisions in Canadian tax law.

Transfer the property to an inter vivos trust.

If you're transferring ownership to a minor child or grandchild, or if you simply want maximum control over the property during your lifetime, a trust set up during your lifetime may be your best option. Consider structuring the trust to permit a corporation, including a non-profit corporation (discussed below), to become a beneficiary in the future. This will provide flexibility in tax planning later.

Set up a non-profit corporation.

If you have a large number of people interested in inheriting the cottage and you're afraid there might be conflicts in the future (such as some family members wanting to sell), you could set up a non-profit corporation, of which each member of the family would be a "member."

The members could be voting or non-voting. Voting members would participate in any decisions related to the property such as whether capital improvements should be made, or whether it should be sold. Each member would be required to pay a membership fee annually to help cover the costs of maintaining the property. If a member doesn't pay his fee, he could eventually lose his membership. The bylaws of the corporation would dictate how the property is to be shared among the members of the corporation.

(prepared by Tim Cestnick/Globe & Mail)