Your vacation home is a special place for you and your family to unwind and recharge. That can all change quickly if you don’t have proper estate planning in place when leaving your vacation home to your heirs. Whether you own a cottage on Eagle Lake or a chalet in Canmore, there are many estate planning approaches that will ensure your legacy is left to future generations.
Leave the Vacation Home in Your Will
Your Will should outline how your estate will transfer the deed to your children. Each person that you cite in the Will would own an equal portion of the property and an equal claim to how the property will be used in the future. Each heir would also bear an equal responsibility for any costs associated with the property, which includes the capital gain taxes associated with the disposition upon your death – something that not each of your heirs may want to endure.
Create a Trust
If you decide to create a trust you would be able to select a trustee to oversee the home while your heirs become the beneficiaries of the trust. Your heirs would have rights to use the home as outlined in the terms, but the trustee would make the decisions regarding the property.
Gift the Property
If you expect the property to appreciate and increase in value in the future, then gifting the property to an heir may be beneficial to defer more tax. This is because when you gift the property, it is disposed of at market value and a taxable gain will occur if the current market value is more than the sum of what the original cost was.
Taking that into account, you should consider whether you will be able to defer more tax now or in the future if the property appreciates. Something else to consider is that if you gift the property at a bargain price, your heirs will need to use that as the base price when they sell the property, possibly acquiring hefty capital gains taxes.
Make sure that you have the appropriate resources in place to pay the capital gains tax if your property has indeed appreciated and you decide to take this route.
Claim as a Principal Residence
You can also tax shelter the property by using the principal residence exemption. When claiming the vacation property as your principal residence, you will be exempt from the capital gains tax that is normally added during disposition. However, if you’ve owned the property from 1982 onwards, you can only claim one property as your principal residence.
You should determine whether your vacation home has appreciated at a higher rate than your current home. If the answer is yes, you may want to designate it as your permanent residence. It’s important to note that upon the second spouse’s death there could be tax to pay if the property has appreciated in value. Consider investing in life insurance to cover any taxes owing at the time of death.
Given these complexities, it’s crucial to calculate and evaluate all the different scenarios before reaching a final decision. Your financial advisor at The Beacon Group of Assante Financial Management Ltd. can assist with estate planning and tax planning to ensure your wishes are met.
