Estate Planning for Vacation Properties
My philosophy as an estate specialist is a bit different.
I remind clients to focus on their family’s needs.
Your first consideration in planning your estate is always the welfare of the people you care about.
The people we leave behind hope they will not inherit your problems.
Family Comes First
When you take the time to prepare an estate plan, you make sure your final wishes and the family’s needs are taken care of.
Too often clients wish only to know the best way of saving money, avoiding probate and reducing income tax.
These topics are always included in any proper estate planning discussion.
However, often you are making calculations based solely on assumptions. The value of your vacation property may rise and fall, like a yoyo.
Trying to make financial decisions based solely on fluctuating market values and estimated income tax liabilities is impossible.
That’s not to say that income tax issues are not important.
Planning to deal with your estate’s income tax liability regarding capital gains with vacation properties is the right thing to do.
Usually, tax considerations are the deal breakers in any decision you have to make.
Here’s an Example
Clients tell me their financial advisors or tax accountants have estimated the capital gains on their vacation property.
The actual numbers vary in every case.
Let’s say a sale or gift of the cottage today can generate an income tax liability of $125,000.
I always ask if the client’s children are going to write the cheque to the government or if the parents are going to do it.
This approach may appear cynical, but it helps clients focus on real available solutions.
My Philosophical Approach
I start with people who have the burden of dealing with the cottage, ski chalet or farm as part of the estate.
You need to involve your family. They are always part of the recipe for success or disaster.
Focusing on your family’s needs is not the same as their wishes.
So how do you discover what your family’s needs are with respect to your vacation property?
You must ask them.
Estate Planning with Family Meetings
There are many experts who swear by this. They will facilitate family conferences and moderate or mediate issues in order to avoid future problems.
Future estate problems can destroy families and their wealth. In some cases, you may need to consider this as a possible option.
In some cases, however, planning meetings may end up in family arguments. This can lead to clients being pressured by their children. But, that is another topic all together.
What Next?
Once you have an idea of your needs, you can seek advice.
Why? Because there so many different options in dealing with vacation properties.
You will find different advisors recommending different strategies. You will find that many are confusing, complicated and very costly to implement. They may be inappropriate for your needs.
For example, incorporating a company to hold the vacation property is a solution in some cases. However, transferring title of your cottage property to a new corporation is a very costly process. It may turn out to be inappropriate.
You may not learn that until after you’ve done it. By then you could have spent tons of cash and not solved the problems, merely created new ones.
Summary
Don’t look for solutions until you assess your needs.
As part of your estate plan, you should learn about the tax consequences of owning vacation property.
Consider with your professional advisors these 3 basic options for dealing with vacation properties:
1. Do nothing specifically with the vacation property in your estate planning.
2. Gift or sell the vacation property now.
3. Deal with the property with a transfer on your death as part of a specific estate plan.
Ed Olkovich
P.S.
Always remember the executor of your estate must deal with your family and vacation property. Will your executor have a conflict of interest? You’ll find choosing the right executor easy with my formula for success in Choosing Executors.
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