Your family has always had a great time at your cabin, so it’s natural to assume you’ll be handing it off to your family after you’re gone.
But if you don’t ask your adult children what they really want and plan for the tax consequences that may not happen. Here are a few essential cabin succession planning steps you should take.
Talk to your adult children now and find out who wants to take on the responsibilities and who doesn’t. Then avoid future family squabbles by making arrangements so your non-cabin inheritors will be treated fairly in your will.
Unless you’re passing assets to a spouse, when you die you are deemed to have disposed of your capital assets at fair market value – meaning if your cabin property has appreciated in value, your estate will face a significant capital gains tax liability.
You do have the benefit of a principal residence tax exemption but you can apply it to just one property at a time and that can be either your cabin or your city home but the one you don’t choose will be subject to tax on its increased value.
There will be tax consequences if your leave the property to your children in your will – so make sure there will be sufficient funds in your estate to pay any tax liabilities.
Life insurance can be a good strategy for covering the capital gains on your cottage.
The death benefits are usually tax-free and can be used as a ready source of cash to avoid a forced sale, to pay capital gains taxes, or to equalize your estate among cabin inheritors and non-cabin inheritors.
Trying to escape paying tax by transferring your cabin to your children during your lifetime won’t work.
It will trigger an immediate capital gain at the ‘fair market value’ of the property. And if you sell your children your cabin at less than ‘fair market value’ you will still have to pay tax on the real price but your children will be deemed to have paid the lower price resulting in double taxation when they sell the cabin.
The only advantage of transferring part or complete ownership during your lifetime is that the amount of the gain taxable in your hands is ‘capped’ at the time of the gift or sale.
It’s a good idea to plan now for the succession of your cabin – and the rest of your estate, for that matter. Your professional and legal advisors can help you work through the options that are best for you.
Andy Erickson is the division director with Investors Group, Vernon. This article is provided for information purposes only. Please consult with a professional advisor before implementing a strategy.