Investing in a second home outside the city to spend precious time with friends and family can be a dream come true for many. It is often also an emotional decision more than an investment decision. As the years pass and as more memories are made, the thought of giving up this piece of heaven is usually the elephant in the room and few families want to broach the subject of what will happen when mom and dad are gone.
There are many issues to overcome when deciding what to do with the cottage; no one can imagine summers or winters without the cabin that has brought the family together for generations. Yet, when the discussion of sharing maintenance costs and upgrades becomes a reality, there is less participation then might have been expected.
For those who have enjoyed the use of the family cottage, priorities are often elsewhere when raising a young family in British Columbia is such an expensive endeavor.
Here are some of the issues that you might face over a lifetime:
- As you age, the upkeep and maintenance will become onerous.
- All the wonderful toys that make your recreational property so much fun for your children and grandchildren will need to be replaced over time. Whether it’s a boat, dock, hot tub, or renovations to your home, you need to plan for upgrades over time.
- When it comes to sharing the property, your family will evolve from children to families and everyone will want a little piece of heaven to themselves, and they don’t always want you around either!
- What are the long-term intentions for the property? Do you want your children to keep the property in the family or do you imagine it to be sold when you can no longer keep up the property?
Most of these issues can be dealt with as they happen except the transfer of property to the next generation. If you want to keep the property in the family it’s not too late to start planning for how to make this happen. Here is one planning strategy with flexibility that can turn your family cottage into a legacy for your family…
First, you need to have a retirement plan that provides cash flow for the upkeep and maintenance of your cottage throughout your lifetime. If you can’t afford to maintain it, you can’t afford to keep it and therefore it’s not possible to pass it on without major investments from your children. Recreational properties are not always easy to sell so your retirement plan should be successful without needing any equity from this property.
A family trust may come into play in the future which has wind up rules so this should be part of your estate plan and not necessarily part of your life plan (this strategy must be done in conjunction with your estate plan and wills and estate lawyer).
The issue you will face in transferring the property is your estate will have to pay the capital gain on the growth of the value of the property in order to transfer it to the next generation. A property valued at $500,000 today has the potential to quadruple in value over 50 years (using a 3% growth rate). This would create a $1,500,000 capital gain and capital gain taxes of approximately $375,000.
Now, consider a permanent or Universal life insurance policy that you fund during your working years that is dedicated to paying for the transfer costs to pass the cottage to your children. Life insurance is a very good investment if you are planning to use it for estate purposes. The proceeds are tax free, it grows tax deferred and falls outside of your estate. You can direct these proceeds through a beneficiary designation, thereby using the proceeds to pay for the taxes and maybe even having something left over to fund upkeep. There is no burden on the children and no decisions for the executor to make. It’s very simple, taxes are paid and now the property is jointly owned or in a trust for the next generation to use and enjoy.
If in your mid to late 40’s or even early 50’s, you were to purchase a joint last to die insurance policy, in 40 years the estate benefit could be $400,000 increasing to $500,000 in 50 years if you live into your late 90’s. By contributing less than $4000/year for 20 years into this policy you have secured the transfer of the property to your children (this article is for concept purposes only, actual values and projections will be on a case by case basis).
There are few families that consider the preservation of their property early enough to participate in this strategy. At a cost of less than $80,000 over 20 years, why not build this into your cost of ownership and truly create a legacy for your family?