Vacation Properties
Date Posted: Apr 02, 2014

Vacation Properties

Vacation properties, such as cottages, are generally dealt with separately from the residue of an estate as there are many considerations related to this type of asset.

When dealing with a vacation property, it is important to specify how the furniture and other associated items, such as a boat or snowmobile, are to be dealt with. If there is a mortgage or other encumbrance on the property, specify if this is to pass to the new owners, or if the estate is required to retire this debt prior to the transfer.

Vacation properties may attract substantial capital gains tax on the death of the owner. It is important to direct whether the tax liability will be paid by the estate or by the recipients of the property. Another option would be to purchase life insurance to cover the potential tax liability and have it payable to the estate. Before purchasing such a policy it is advisable to discuss the situation with your tax or insurance advisor.

Where several members of a family customarily use the property, it could be transferred directly to those individuals (joint with right-of-survivorship or as tenants-in-common). Great care must be exercised if selecting this option because, over time, such an arrangement can create problems. Not everyone will use the property to the same degree and there may be disagreement on the need for repairs and upgrading. Consider what would happen to the family dynamics should one want to sell their interest and the remaining beneficiaries cannot afford the buyout.

If only one or two of the family want the cottage, it may be prudent to leave the cottage to those individuals and provide other assets such as insurance to the remaining beneficiaries; the beneficiaries could pay the insurance premiums equally.

Some testators choose to place a vacation property in a testamentary trust with all of the family members having the right to use the property. This would protect the property should any of your beneficiaries divorce or claim bankruptcy, but you may be binding the hands of future generations.

Another alternative to consider is an “option to purchase”. This gives one or more named individuals the first opportunity to purchase the vacation property for a specified price within a stated time period. The purchase price could be set at either market value or at a reduced price and there could be favourable repayment terms as part of the package. In this way, the individual(s) who really want the vacation property are able to acquire it.

The division of the sale proceeds allows for a more equitable distribution among all the beneficiaries. Before selecting this alternative, the member must investigate the income tax implications associated with the sale of this asset.

Whatever choice is considered, it is imperative that all options are discussed openly and honestly with your family, as well as your estate planning professional, your estate and trust lawyer and your tax or insurance advisor.

*Reprinted from the Trust Services Bulletin with permission from Concentra Financial. This article does not constitute legal opinion or advice. Readers are cautioned not to act on information provided without seeking specific advise with respect to the particular situation.

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