The Best of The Blunt Bean Counter - Inheriting the Cottage/Cabin/Chalet –The Great Estate Planning Challenge

This summer I am re-posting the "best of" The Blunt Bean Counter blog while I work on my golf game. Today, I am posting a November, 2014 blog titled "Inheriting the Cottage/Cabin/Chalet - The Great Estate Planning Challenge. While this post is almost eight years old, it is still relevant today and what better time to contemplate the future use of your cottage than while you are spending time there. 

This blog post was written by my most popular guest poster, Katy Basi. Katy has guest posted such BBC favourites as Qualifying Spousal Trusts - What are They and Why do we Care?, a three part series on new will provisions for the 21st century dealing with your digital life, RESPs and reproductive assets and Alter Ego Trusts and Joint Partner Trusts - A Primer. Without further ado, here is Katy!

Inheriting the Cottage/Cabin/Chalet –The Great Estate Planning Challenge 

By Katy Basi

From my lovely vantage point on the dock at my dad’s cottage, looking around the lake at all of the other family cottages, I’m reminded that every cottage, cabin and chalet has a story. Some have been in the same family for generations, with or without accompanying drama. Too many more were sold to a third party against the expectations of the family, often as a result of poor estate planning.

 

The family vacation home can be the Cyanean Rocks against which an estate plan crashes and sinks. (The Cyanean Rocks, aka the Symplegades, were a pair of rocks at the Bosphorus that moved, causing major problems to boats in the area until Jason and the Argonauts defeated the rocks). There are many factors that make planning for this property more challenging than for other assets. For example:

1. Often the legal ownership of a cottage does not reflect the practical reality of the cottage situation (for the remainder of this blog, I will refer to the “cottage” as this is the term commonly used in Ontario, but no disrespect is intended to owners of cabins and chalets - many of the same principles and problems will apply!) Due to the inter-generational history of many cottages, cottage ownership is often just not as simple as ownership of a primary residence. I have seen cottage ownership being shared between siblings, or divided among parents and all of their adult children. Sometimes a child is on title “but everyone understands that the cottage belongs to mom”. A parent may own only a “life interest” in the cottage, with adult children holding the “remainder interest”. Other times, ownership was transferred to a trust in the misty reaches of time. If a trust owns your cottage, you’ll want to read my companion blog next week entitled “Cottage Trusts” to ensure that you are aware of some nasty tax traps with the cottage trust structure.


2. If an owner spends any time at a cottage with his/her family, the cottage will qualify as a matrimonial home for family law purposes, and may therefore be shareable upon a later separation or divorce of the owner (unless there is a marriage contract in place which addresses this issue). Let’s say, for example, that in your Will you leave your cottage to your son Adam and your daughter Beth as 50/50 tenants in common (not as joint tenants, as you want Adam’s children to be able to inherit his 50% interest if Adam so chooses). You shuffle off of this mortal coil, so that Adam becomes a co-owner of the cottage. Adam spends a week a year at the cottage with his wife and two children. Adam then separates, and his wife makes a claim for 50% of Adam’s 50% interest in the cottage on the basis that it is a matrimonial home. Will Adam be able to pay 25% of the value of the cottage to his ex as part of the settlement? Will he need to sell his interest in the cottage to Beth to provide the funds for this payment? If Beth cannot afford to buy Adam’s share, this issue may result in the sale of the cottage to a third party. Leaving the cottage to your beneficiaries in a cottage trust created in your Will may be helpful in this respect if marriage contracts are not doable (this planning technique is discussed in more detail in my “Cottage Trusts” blog).


3. Cottages are expensive to maintain. Not every beneficiary who wants the cottage can afford the upkeep, and not every beneficiary who can afford the upkeep wants the cottage.


4. Family members often have strong emotional attachments to the cottage. Leaving the cottage in your Will to the child with the financial resources to maintain the cottage may be the smart choice from a monetary perspective, but if this decision leads to lifelong conflict between the cottage child and the non-cottage child, it may not be the best plan taking all considerations into account.


5. Cottages are not divisible in the same way as financial assets. Cottage owners who intend to leave the cottage to more than one person need to ask themselves what the practical implications are of each beneficiary inheriting only a share of the cottage. For example, co-ownership agreements are strongly recommended whenever more than one person or family shares ownership of a cottage. These agreements can provide for the payment of maintenance expenses and utilities associated with the cottage, allocation of time at the cottage, “shared time” (everyone is welcome!) versus “private time” (my family only please…), policies on having pets/friends over to stay (allergies? replenishment of beverages required?), bringing household items to/taking household items from the cottage, etc.


6. If the cottage owner has owned the cottage for a number of years, there is often a large accrued capital gain on the cottage that is triggered upon the owner’s death. If the owner does not have sufficient liquid assets to pay the tax, and the beneficiaries do not have the funds, the cottage must often be sold simply to pay this tax bill. Insurance on the life of the owner is often recommended, where available at an affordable premium, to backfill this monetary gap. Sometimes a beneficiary is given the cottage in the Will upon the condition that the beneficiary pays the related capital gains tax, saving the other beneficiaries of the estate from bearing part of this burden. The calculation of the capital gain is often complex due to shoeboxes of receipts, collected over decades, which may or may not affect the adjusted cost base ("ACB") of the cottage, as well as principal residence issues (sometimes a cottage may be designated as a principal residence for certain years of ownership….and sometimes not!)

If you own a cottage, it is strongly recommended that you speak with a professional to ensure that your cottage estate plan is optimized. My sisters and I spent lots of idyllic summers at my dad’s cottage as children, and we’re very lucky to still be able to enjoy the cottage, and the memories it holds for us, to this day. I hope that I’ve helped my family create an estate plan whereby my children, and my nieces and nephews, will be just as fortunate, and I wish the same for you.

Katy Basi is a barrister and solicitor with her own practice, focusing on wills, trusts, estate planning, estate administration and income tax law. Katy practiced income tax law for many years with a large Toronto law firm, and therefore considers the income tax and probate tax implications of her clients' decisions. Please feel free to contact her directly at (905) 237-9299, or by email at katy@basilaw.com. More articles by Katy can be found at her website, http://www.basilaw.com/

Other Cottage Blog Posts by The Blunt Bean Counter 

Over the years I have written a couple other blog posts on cottage related topics. They include: 

 

Cottages - Cost Base Additions, are they a new CRA Audit Target?

Transferring the Family Cottage - Part 1,  Part 2, Part 3

The above blog post is for general information purposes only and does not constitute legal or other professional advice or an opinion of any kind. Readers are advised to seek specific legal advice regarding any specific legal issues.

 

This site provides general information on various tax issues and other matters. The information is not intended to constitute professional advice and may not be appropriate for a specific individual or fact situation. It is written by the author solely in their personal capacity and cannot be attributed to the accounting firm with which they are affiliated. It is not intended to constitute professional advice, and neither the author nor the firm with which the author is associated shall accept any liability in respect of any reliance on the information contained herein. Readers should always consult with their professional advisors in respect of their particular situation. Please note the blog post is time sensitive and subject to changes in legislation or law.

The Best of The Blunt Bean Counter - How your Family Dynamic can affect your Estate Planning

This summer I am posting the "best of" The Blunt Bean Counter blog while I work on my golf game. Today, I am re-posting a September, 2011 blog post on how your family dynamic can affect your estate planning.

I have found many parents often ignore the interrelationship of their children in their estate planning, which can often be problematic when the parent dies. So ensure you consider these relationships when undertaking your estate planning.

How your Family Dynamic can Affect your Estate Planning

Estate planning is a complicated and delicate process. Where you have more than one child, the planning process is full of minefields, some are in clear sight, but many are hidden. Parents have to navigate these minefields with respect to the determination of executors, the distribution of family heirlooms and the distribution of hard assets. The above decisions may be impacted by the financial wherewithal of your children, your relationship with your children’s spouses, your grandchildren or lack thereof, and in some cases, favouritism of certain of your children.

The above are what I call vertical family hierarchy issues. These are issues resulting from parents making decisions that will affect their children and potentially, the way their children will view their parents after death.

What parents do not often consider is how these vertical decisions impact horizontally: i.e. how the interrelationship of your children must be considered in your estate planning. Any parent who does not consider these relationships runs the risk of creating a divisive wedge amongst their children as sibling rivalry and jealousies may rear their ugly heads.

In this blog, I will attempt to identify several estate planning issues that not only have vertical consequences, but also have horizontal consequences requiring parents to consider their children’s relationships in context of their planning.

The Family Business

Where there is a family business and the succession plan is to pass on the business to the next generation, several issues must be considered. The issues include the following:

How many children have an interest in the family business?

If you have more than one child, is one specific child best suited to the role of CEO or president? If so, based on your children’s current relationship(s), do you foresee them working together or will they butt heads or worse? If the eldest child is named president, have you reinforced a perception the younger child has held for years, that the eldest is favoured and always assumed the most capable?

How do you value the business?

This is not an issue if all the children are given equal shares of the business, since they will have an equal ownership no matter the actual value attributed to the company. But what if you decide to leave the business to one child and equalize a child or the other children with say cash or other assets? The value of the business can fluctuate wildly over the years, with the result being that the child who inherits the shares may in essence have inherited a significantly larger asset than the other child(ren). Alternatively, the shares of the company may prove to be worth substantially less than the assets distributed to the other child(ren) if business conditions cause the value of the business to diminish. As a parent, can you do anything to avoid potential disparities in value? I have seen situations where asset distributions were equal at the time of death, but the inherited business grew astronomically and the children who did not inherit the company shares felt wronged by their parents.

Finally, if you have undertaken an estate freeze while alive, (see my blog on introducing a family trust as a shareholder and the related discussion on estate freezes) which child will inherit the voting shares? You risk alienating the children who do not receive the voting shares, since they may feel that you did not think they had enough acumen to vote and run the company.

The Family Cottage

The family cottage is often a contentious asset. In some families all the children want to keep ownership of the cottage and in some families only one or two siblings want the cottage. As a parent, you must speak to your children and determine who wants the cottage. Where more than one child wants the cottage, you have to consider whether those children have a good relationship and if they will be able to share ownership of the cottage without starting a world war. If not, do you have to consider selling the cottage in your later years to avoid creating a divisive issue amongst your children?

Another important factor to consider is whether the children interested in keeping the cottage have the financial wherewithal to pay their share of the cottages expenses on a yearly basis? If not, how do you overcome this potential issue, especially if one child has the financial resources and another does not?

Also, where there is a large inherent gain on the cottage, you have to determine whether your estate will be able to pay the income taxes without forcing a sale of the cottage and causing the estate to unwind your original intention to keep the cottage in the family? In this case, you may be able to use life insurance to cover off this issue.

The Will

A will may be construed as a document that reflects a parent’s opinion of their children and confirms the children’s opinion of themselves. If you infer one child is more responsible than the others (by selecting a certain child(ren) as an executor and excluding others), you risk igniting the fire of past resentments amongst the children and potentially causing resentment of you even in death.

Assuming you can navigate the determination of the executor(s) amongst your children without creating jealousy or animosity (if not, a corporate executor may be required), how do you distribute your assets upon death in a manner that mitigates any damage that can occur to your children’s relationships?

The distribution of material items is fraught with danger. How does one ever balance sentimentality and value? If you provide one child a sentimental heirloom, you risk that child complaining the other children got more value, while the other children complain they were not left sentimental heirlooms. What if you have art? How do you balance the value of art that has significant value differentials?

What about the situation where one child has been financially successful and another has not. If your will provides for a greater distribution to the child with less money, how do you ensure you do not create resentment with the financially well-off child? The less well-off child, who should be ecstatic, may actually be insulted, as they interpret the larger inheritance as their parents saying they were "financial losers" as opposed to being grateful for the larger inheritance. In these cases, one must tread carefully, but an unequal allocation may be more readily accepted where you explain your reasoning to your children before your death.

Another issue is grandchildren. Where the number of grandchildren is different in each family or one child does not have any family, do you give equal amounts to each family or equal amounts per child? How about where one of your children may be incapable of providing for a grandchild’s education and you feel a trust would be appropriate? Will any consideration other than equal consideration be construed as favouritism by your children?

Finally, many parents have provided loans to their children to assist with university, purchasing a house or what have you. How do you deal with prior gifts or loans? If you forgive the loans, you may have an unequal distribution and cause an issue among your children? Thus, you may want to consider a reduction of any distributions in the will for any outstanding loans.

This whole blog may be construed as ludicrous on a certain level. Some may say this blog is evidence as to why they will not leave anything to their children. Others may say I will leave my children whatever I feel like and if the distribution is unequal, so be it. However, it has been my experience that the majority of parents truly do not want to create any dissension among their children and aim to provide for an equal distribution. Even though they will have passed on, many parents still don’t want to alienate any of their children or cause resentment upon their death.

This site provides general information on various tax issues and other matters. The information is not intended to constitute professional advice and may not be appropriate for a specific individual or fact situation. It is written by the author solely in their personal capacity and cannot be attributed to the accounting firm with which they are affiliated. It is not intended to constitute professional advice, and neither the author nor the firm with which the author is associated shall accept any liability in respect of any reliance on the information contained herein. Readers should always consult with their professional advisors in respect of their particular situation.

Cottage Trusts

Last week Katy Basi wrote a blog post on the various estate planning challenges in passing on your cottage to your family. Today, in part 2 of her series, Katy discusses the use of cottage trusts to facilitate the transfer of your cottage. I thank Katy for her excellent series.

Cottage Trusts

By Katy Basi

 

This blog is a follow-up to my previous blog on the topic of inheriting a cottage, cabin or chalet. There are three main reasons that I have come across for a cottage in Ontario to be owned by a trust:

1) Minimization of estate administration tax, aka probate tax. Ownership of a cottage by a trust was a popular strategy in Ontario in first half of the 1990’s as a way to avoid having to pay probate tax on the value of the cottage. (In the first half of the 1990’s the Ontario government increased the rate of probate tax from its then fairly negligible rate to its current level (1.5% of the fair market value of an estate over $50,000)). A number of cottage owners were convinced to transfer the cottage to a trust in order to avoid probate tax on the value of the cottage upon their death. Many of these trusts are now reaching their 21 year anniversary. Without professional planning, a cottage trust will be required to pay tax on any accrued capital gain on the cottage due to the “21 year deemed disposition rule”. Given the increase in Ontario cottage prices over the last 21 years, very significant tax bills could result. There is often planning that can be undertaken to avoid this capital gain, usually involving a transfer of the cottage to one or more beneficiaries of the trust, but this planning must be undertaken a number of months before the 21st anniversary. If this is your situation, do not delay in getting professional advice!

2) Protection from having to share the value of the cottage upon separation or divorce. As noted in my previous cottage blog, a cottage often qualifies as a matrimonial home for family law purposes, in which case the value of the cottage is shareable upon a separation or divorce (as part of a process called “equalization”). If the cottage is instead owned by a discretionary trust, with a number of beneficiaries, and no guaranteed right of the beneficiaries to any of the income or capital of the trust, the argument can be made that none of the beneficiaries actually own the cottage or have any right to the cottage that can be valued, so that no equalization payment should be made. I advise my clients that a family court may “look through” any trust, including a cottage trust, and allocate a value to a discretionary trust interest. However, if three siblings would otherwise co-own a cottage, each having a one-third interest subject to potential equalization, this situation may be ameliorated by having a discretionary family trust own the cottage with the three siblings as trustees, and the siblings and all of their children as potential beneficiaries. If each sibling has two children, there will be 9 beneficiaries. The value of a 1/9 interest in the trust will be far less than the value of a 1/3 direct ownership interest, and there is a chance that a sibling’s interest will be valued at nil due to the discretionary nature of the trust.

3) “Wait and see” trust. When a cottage owner wants to give their children the option of inheriting the cottage, but is unsure as to whether the children will be able to deal with the practical issues of cottage ownership, and the even greater challenges of cottage co-ownership, a “wait and see” trust may be a good option. The cottage owner leaves the cottage to a cottage trust in his or her Will. The cottage trust is structured to last for the length of time that the parent thinks will be required for the children to figure out a workable long term plan for the cottage. If there are sufficient funds in the estate, the parent may leave a “cottage maintenance fund” as part of the cottage trust in order to reduce the financial burden on the children of maintaining the cottage for the duration of the trust. Upon the termination of the cottage trust, the children figure out if they will co-own the cottage, whether one child will buy out the other children’s interests, or whether the cottage will be sold to a third party.

Transferring a cottage to a trust during the lifetime of the owner can trigger capital gains tax, unless the trust qualifies as an alter ego trust or a joint partner trust. In addition, the trust itself is a separate taxpayer which pays tax at the highest marginal rate, resulting in higher tax bills, under certain circumstances, compared to ownership by the previous owner. Cottage trusts are often created in the Will of the cottage owner as a method of assisting the beneficiaries to keep the cottage in the family, given that any accrued capital gain on the cottage is taxable upon the death of the owner in any event (especially where the owner does not leave the cottage to his or her spouse). Cottage trusts are not appropriate for all situations, but they can be a lifesaver under the right circumstances.

Katy Basi is a barrister and solicitor with her own practice, focusing on wills, trusts, estate planning, estate administration and income tax law. Katy practiced income tax law for many years with a large Toronto law firm, and therefore considers the income tax and probate tax implications of her clients' decisions. Please feel free to contact her directly at (905) 237-9299, or by email at katy@katybasi.com. More articles by Katy can be found at her website, katybasi.com.

The above blog post is for general information purposes only and does not constitute legal or other professional advice or an opinion of any kind. Readers are advised to seek specific legal advice regarding any specific legal issues.

The blogs posted on The Blunt Bean Counter provide information of a general nature. These posts should not be considered specific advice; as each reader's personal financial situation is unique and fact specific. Please contact a professional advisor prior to implementing or acting upon any of the information contained in one of the blogs. Please note the blog post is time sensitive and subject to changes in legislation or law.

Inheriting the Cottage/Cabin/Chalet –The Great Estate Planning Challenge

My life is a bit crazy currently, so I have asked my most popular guest poster, Katy Basi to step in for the next two weeks. Katy has guest posted such BBC favourites as Qualifying Spousal Trusts - What are They and Why do we Care? and a three part series on new will provisions for the 21st century dealing with your digital life, RESPs and reproductive assets. This week and next, Katy deals with a more meat and potatoes subject, the Cottage. Before Katy gets going, you may wish to review a three part series I wrote a couple years back for the Canadian Capitalist on the taxation of cottages ( part 1, part 2, part 3). So without further ado, here is Katy!

Inheriting the Cottage/Cabin/Chalet –The Great Estate Planning Challenge 

By Katy Basi

From my lovely vantage point on the dock at my dad’s cottage, looking around the lake at all of the other family cottages, I’m reminded that every cottage, cabin and chalet has a story. Some have been in the same family for generations, with or without accompanying drama. Too many more were sold to a third party against the expectations of the family, often as a result of poor estate planning.

The family vacation home can be the Cyanean Rocks against which an estate plan crashes and sinks. (The Cyanean Rocks, aka the Symplegades, were a pair of rocks at the Bosphorus that moved, causing major problems to boats in the area until Jason and the Argonauts defeated the rocks). There are many factors that make planning for this property more challenging than for other assets. For example:

1. Often the legal ownership of a cottage does not reflect the practical reality of the cottage situation (for the remainder of this blog, I will refer to the “cottage” as this is the term commonly used in Ontario, but no disrespect is intended to owners of cabins and chalets - many of the same principles and problems will apply!) Due to the inter-generational history of many cottages, cottage ownership is often just not as simple as ownership of a primary residence. I have seen cottage ownership being shared between siblings, or divided among parents and all of their adult children. Sometimes a child is on title “but everyone understands that the cottage belongs to mom”. A parent may own only a “life interest” in the cottage, with adult children holding the “remainder interest”. Other times, ownership was transferred to a trust in the misty reaches of time. If a trust owns your cottage, you’ll want to read my companion blog next week entitled “Cottage Trusts” to ensure that you are aware of some nasty tax traps with the cottage trust structure.


2. If an owner spends any time at a cottage with his/her family, the cottage will qualify as a matrimonial home for family law purposes, and may therefore be shareable upon a later separation or divorce of the owner (unless there is a marriage contract in place which addresses this issue). Let’s say, for example, that in your Will you leave your cottage to your son Adam and your daughter Beth as 50/50 tenants in common (not as joint tenants, as you want Adam’s children to be able to inherit his 50% interest if Adam so chooses). You shuffle off of this mortal coil, so that Adam becomes a co-owner of the cottage. Adam spends a week a year at the cottage with his wife and two children. Adam then separates, and his wife makes a claim for 50% of Adam’s 50% interest in the cottage on the basis that it is a matrimonial home. Will Adam be able to pay 25% of the value of the cottage to his ex as part of the settlement? Will he need to sell his interest in the cottage to Beth to provide the funds for this payment? If Beth cannot afford to buy Adam’s share, this issue may result in the sale of the cottage to a third party. Leaving the cottage to your beneficiaries in a cottage trust created in your Will may be helpful in this respect if marriage contracts are not doable (this planning technique is discussed in more detail in my “Cottage Trusts” blog).


3. Cottages are expensive to maintain. Not every beneficiary who wants the cottage can afford the upkeep, and not every beneficiary who can afford the upkeep wants the cottage.


4. Family members often have strong emotional attachments to the cottage. Leaving the cottage in your Will to the child with the financial resources to maintain the cottage may be the smart choice from a monetary perspective, but if this decision leads to lifelong conflict between the cottage child and the non-cottage child, it may not be the best plan taking all considerations into account.


5. Cottages are not divisible in the same way as financial assets. Cottage owners who intend to leave the cottage to more than one person need to ask themselves what the practical implications are of each beneficiary inheriting only a share of the cottage. For example, co-ownership agreements are strongly recommended whenever more than one person or family shares ownership of a cottage. These agreements can provide for the payment of maintenance expenses and utilities associated with the cottage, allocation of time at the cottage, “shared time” (everyone is welcome!) versus “private time” (my family only please…), policies on having pets/friends over to stay (allergies? replenishment of beverages required?), bringing household items to/taking household items from the cottage, etc.


6. If the cottage owner has owned the cottage for a number of years, there is often a large accrued capital gain on the cottage that is triggered upon the owner’s death. If the owner does not have sufficient liquid assets to pay the tax, and the beneficiaries do not have the funds, the cottage must often be sold simply to pay this tax bill. Insurance on the life of the owner is often recommended, where available at an affordable premium, to backfill this monetary gap. Sometimes a beneficiary is given the cottage in the Will upon the condition that the beneficiary pays the related capital gains tax, saving the other beneficiaries of the estate from bearing part of this burden. The calculation of the capital gain is often complex due to shoeboxes of receipts, collected over decades, which may or may not affect the adjusted cost base ("ACB") of the cottage (see Mark's blog post on ACB adjustments for cottages), as well as principal residence issues (sometimes a cottage may be designated as a principal residence for certain years of ownership….and sometimes not!)

If you own a cottage, it is strongly recommended that you speak with a professional to ensure that your cottage estate plan is optimized. My sisters and I spent lots of idyllic summers at my dad’s cottage as children, and we’re very lucky to still be able to enjoy the cottage, and the memories it holds for us, to this day. I hope that I’ve helped my family create an estate plan whereby my children, and my nieces and nephews, will be just as fortunate, and I wish the same for you.

Katy Basi is a barrister and solicitor with her own practice, focusing on wills, trusts, estate planning, estate administration and income tax law. Katy practiced income tax law for many years with a large Toronto law firm, and therefore considers the income tax and probate tax implications of her clients' decisions. Please feel free to contact her directly at (905) 237-9299, or by email at katy@katybasi.com. More articles by Katy can be found at her website, katybasi.com.

The above blog post is for general information purposes only and does not constitute legal or other professional advice or an opinion of any kind. Readers are advised to seek specific legal advice regarding any specific legal issues.

The blogs posted on The Blunt Bean Counter provide information of a general nature. These posts should not be considered specific advice; as each reader's personal financial situation is unique and fact specific. Please contact a professional advisor prior to implementing or acting upon any of the information contained in one of the blogs. Please note the blog post is time sensitive and subject to changes in legislation or law.

How your Family Dynamic can affect your Estate Planning

Estate planning is a complicated and delicate process. Where you have more than one child, the planning process is full of minefields, some are in clear sight, but many are hidden. Parents have to navigate these minefields with respect to the determination of executors, the distribution of family heirlooms and the distribution of hard assets. The above decisions may be impacted by the financial wherewithal of your children, your relationship with your children’s spouses, your grandchildren or lack thereof, and in some cases, favouritism of certain of your children.

The above are what I call vertical family hierarchy issues. These are issues resulting from parents making decisions that will affect their children and potentially, the way their children will view their parents after death.

What parents do not often consider is how these vertical decisions impact horizontally: i.e. how the interrelationship of your children must be considered in your estate planning. Any parent who does not consider these relationships runs the risk of creating a divisive wedge amongst their children as sibling rivalry and jealousies may rear their ugly heads.

In this blog, I will attempt to identify several estate planning issues that not only have vertical consequences, but also have horizontal consequences requiring parents to consider their children’s relationships in context of their planning.

The Family Business

Where there is a family business and the succession plan is to pass on the business to the next generation, several issues must be considered. The issues include the following:

How many children have an interest in the family business?

If you have more than one child, is one specific child best suited to the role of CEO or president? If so, based on your children’s current relationship(s), do you foresee them working together or will they butt heads or worse? If the eldest child is named president, have you reinforced a perception the younger child has held for years, that the eldest is favoured and always assumed the most capable?

How do you value the business?

This is not an issue if all the children are given equal shares of the business, since they will have an equal ownership no matter the actual value attributed to the company. But what if you decide to leave the business to one child and equalize a child or the other children with say cash or other assets? The value of the business can fluctuate wildly over the years, with the result being that the child who inherits the shares may in essence have inherited a significantly larger asset than the other child(ren). Alternatively, the shares of the company may prove to be worth substantially less than the assets distributed to the other child(ren) if business conditions cause the value of the business to diminish. As a parent, can you do anything to avoid potential disparities in value? I have seen situations where asset distributions were equal at the time of death, but the inherited business grew astronomically and the children who did not inherit the company shares felt wronged by their parents.

Finally, if you have undertaken an estate freeze while alive, (see my blog on introducing a family trust as a shareholder and the related discussion on estate freezes) which child will inherit the voting shares? You risk alienating the children who do not receive the voting shares, since they may feel that you did not think they had enough acumen to vote and run the company.

The Family Cottage

The family cottage is often a contentious asset. In some families all the children want to keep ownership of the cottage and in some families only one or two siblings want the cottage. As a parent, you must speak to your children and determine who wants the cottage. Where more than one child wants the cottage, you have to consider whether those children have a good relationship and if they will be able to share ownership of the cottage without starting a world war. If not, do you have to consider selling the cottage in your later years to avoid creating a divisive issue amongst your children?

Another important factor to consider is whether the children interested in keeping the cottage have the financial wherewithal to pay their share of the cottages expenses on a yearly basis? If not, how do you overcome this potential issue, especially if one child has the financial resources and another does not?

Also, where there is a large inherent gain on the cottage, you have to determine whether your estate will be able to pay the income taxes without forcing a sale of the cottage and causing the estate to unwind your original intention to keep the cottage in the family? In this case, you may be able to use life insurance to cover off this issue.

The Will

A will may be construed as a document that reflects a parent’s opinion of their children and confirms the children’s opinion of themselves. If you infer one child is more responsible than the others (by selecting a certain child(ren) as an executor and excluding others), you risk igniting the fire of past resentments amongst the children and potentially causing resentment of you even in death.

Assuming you can navigate the determination of the executor(s) amongst your children without creating jealousy or animosity (if not, a corporate executor may be required), how do you distribute your assets upon death in a manner that mitigates any damage that can occur to your children’s relationships?

The distribution of material items is fraught with danger. How does one ever balance sentimentality and value? If you provide one child a sentimental heirloom, you risk that child complaining the other children got more value, while the other children complain they were not left sentimental heirlooms. What if you have art? How do you balance the value of art that has significant value differentials?

What about the situation where one child has been financially successful and another has not. If your will provides for a greater distribution to the child with less money, how do you ensure you do not create resentment with the financially well-off child? The less well-off child, who should be ecstatic, may actually be insulted, as they interpret the larger inheritance as their parents saying they were "financial losers" as opposed to being grateful for the larger inheritance. In these cases, one must tread carefully, but an unequal allocation may be more readily accepted where you explain your reasoning to your children before your death.

Another issue is grandchildren. Where the number of grandchildren is different in each family or one child does not have any family, do you give equal amounts to each family or equal amounts per child? How about where one of your children may be incapable of providing for a grandchild’s education and you feel a trust would be appropriate? Will any consideration other than equal consideration be construed as favouritism by your children?

Finally, many parents have provided loans to their children to assist with university, purchasing a house or what have you. How do you deal with prior gifts or loans? If you forgive the loans, you may have an unequal distribution and cause an issue amongst your children? Thus, you may want to consider a reduction of any distributions in the will for any outstanding loans.

This whole blog may be construed as ludicrous on a certain level. Some may say this blog is evidence as to why they will not leave anything to their children. Others may say I will leave my children whatever I feel like and if the distribution is unequal, so be it. However, it has been my experience that the majority of parents truly do not want to create any dissension amongst their children and aim to provide for an equal distribution. Even though they will have passed on, many parents still don’t want to alienate any of their children or cause resentment upon their death.

The blogs posted on The Blunt Bean Counter provide information of a general nature. These posts should not be considered specific advice; as each reader's personal financial situation is unique and fact specific. Please contact a professional advisor prior to implementing or acting upon any of the information contained in one of the blogs.

Transferring the Family Cottage-There is no Panacea-Part 1

The final blog in my three part series on Executors; ”Is a Corporate Executor the Right Choice?" will be posted next week.

This week I am going to post links to a three part blog I wrote on transferring the family cottage, which the Canadian Capitalist has kindly posted. For anyone who does not know the Canadian Capitalist, it is one of the preeminent financial blogs in Canada.

The cottage blog series will be broken into three blogs. The first blog will discuss the historical nature of the income tax rules, while the second blog will discuss the income tax implications of transferring or gifting a cottage and finally in the third blog, I will discuss alternative income tax planning opportunities that may mitigate or defer income tax upon the transfer of a family cottage.

I hope you find the cottage series informative. I will post my week 8 Confessions of a Tax Accountant later in the week.

The blogs posted on The Blunt Bean Counter provide information of a general nature. These posts should not be considered specific advice; as each reader's personal financial situation is unique and fact specific. Please contact a professional advisor prior to implementing or acting upon any of the information contained in one of the blogs.