3 succession case studies
How these cottagers passed on their properties
Situation: Small cottage, no room to expand, the children have different levels of attachment to the property, an urgent need for renovations
Solution: Transfer the cottage to one committed child now while retaining a life interest for yourself
When Wanda Gral’s husband died in 1995, the 67-year-old waitress already owned the family cottage outright, but decided to transfer it to one of her three children: the one who was most interested and most financially committed to managing and improving the property. That was not her oldest son, then 46, or his 41-year-old brother, but her unmarried 31-year-old daughter, Judianne, who had been planning to pay for major renovations to the cottage. “I wanted to make sure the cottage stays in the family,” says Wanda. “I wasn’t sure if my oldest son might want to sell it. And Judianne has put so much into it.” The other son rarely used the cottage because of his back problems. Judianne herself is deeply attached to the cottage because of her love for her late father, who was an avid fisherman and cottager. “Maybe part of me thinks I would lose part of my father, if I lost the cottage,” she says.
The Grals’ solution is one that many estate-planning lawyers urge parents to consider. “Our basic thrust is to make some hard decisions about who should receive the cottage, rather than trying to share it,” says David Currie, a lawyer with the law firm of Thoms & Currie in Huntsville, Ont. “It’s easier on everyone involved for the parent to make the unpopular decision. And all the children have different means and attachments to the cottage.” However, as lawyer Peter Lillico points out, parents who want to leave each child a roughly equal share of the estate have to plan carefully. Giving the cottage to one child and leaving the remaining two-thirds of the estate to the other two at death, for example, may ultimately be inequitable if the two who receive the remainder have to pay the capital gains tax on the cottage from their share of the estate.
In the Grals’ case, the family was dealing with an 18 ft. wide cottage with visible lean on a 25 ft. wide lot on Orr Lake, between Barrie and Midland. Although it has three bedrooms, it was not well-suited to extended family use. The cottage cost only $2,800 in 1949, when Wanda’s husband bought it for her as a birthday present. When Wanda transferred the cottage to Judianne in 1995, the cabin was valued at roughly $50,000. She paid capital gains tax on deemed disposition of the property to her daughter and, when she dies, no further capital gains tax will need to be paid until the cottage passes out of Judianne’s hands. Since she retained a life interest in the property, her name remains on the deed and she can continue to use the cottage. Furthermore, it cannot be unilaterally sold by Judianne. Wanda also protected the property from any potential future claims from a divorcing spouse by having her lawyer document that the cottage was a gift.
Wanda, who has already been very generous with her two sons, was not concerned about the impact of her cottage decision on the other children. She had already invested in the house of one son, and the one with back problems lives at home with her. Both of them will eventually share in the proceeds from the sale of the family home on her death. And she was worried that Judianne’s personal labour on the cottage might not be compensated if a co-owning sibling wanted to trigger a sale. “That girl has gone up and stripped the roof and reshingled it herself, with her fiancé,” says Wanda. Since 1995, Judianne has also installed a septic system, a bathroom, and siding, and made other improvements. “This is my dream place,” says Judianne. “It’s something I can’t lose.”
This article was originally published on May 17, 2004