Creating a succession plan

Cottage owners sometimes choose to establish inter vivos, or living, trusts to give the property to the children during their lifetime and thus avoid the probate process associated with a will. The province charges probate fees at a rate of $5 per thousand on the first $50,000, then $15 per thousand for the remaining value (for example $2,500 on a $200,000 cottage).

In the past, inter vivos trusts had the downside of triggering capital gains tax when the owner transferred the property in. But according to Mike Bushell, a trust advisor with Scotia Private Client Group in Barrie, Ont., there is now a new vehicle called an alter ego trust, which allows an individual who is 65 years old or older to set aside the property for the children without triggering any tax liability. The property that is rolled into the trust continues to be held in his own name and for his own benefit during his lifetime. He can even designate himself the sole trustee. Upon his death, the trust document acts like a will and identifies the children who will receive the cottage, which will finally trigger capital gains tax, but not probate fees nor any of the typical delays or lack of privacy associated with probate.

The downside is that the tax treatment of assets coming out of these trusts is at the highest marginal rate for individuals, not graduated rates. An upside, however, is that the tax becomes payable at a time when other assets in the estate, such as life insurance, may be available to fund it. Also, parents can inform the ultimate beneficiaries in advance, so that family members can plan accordingly, although the owner is not compelled to do so.