Dear Expert:
My parents own a summer cottage. They are in their early 80s and are both healthy, but due to driving competency and mobility issues, it has become apparent that they cannot go there without me, my brother or someone else who is able to cope. While we feel we can manage the present situation, it is the future that has me worried. Can you offer any advice on how and when to transfer ownership of a family cottage to the next generation? While my brother believes we can jointly own and manage the property, I have my doubts based on his financial position. As it is a fairly simple summer place, utilities are not a big cost. But as it is on a lake, its valuation is quite high--about $300,000--and the annual property taxes are in the neighbourhood of $4,000. Even if we decide that my brother can afford to share ownership, there are other issues to consider, such as whether my parents should sign over the place to us now (i.e., enter a power of attorney situation before they die) or just leave it to us jointly in their will?
Fortunately, my parents' investment portfolio is larger than the value of the cottage, so there is money to pay for upkeep until we resolve the ownership issue, and in theory there would be enough cash in the estate after their death to allow one of us to buy out the other should we decide to go that route. That of course, assumes that we keep enough money to do so safely invested. I have heard anecdotally that this is a thorny issue, but we really want to keep the cottage in the family!
Expert Answer:
A thorny issue, indeed. Beware that if your parents transfer ownership to you and your brother, they are deemed to have gifted the cottage away at fair market value and they will have to pay the capital gains taxes now, rather than keeping it in their name until death.
You may find there are better ways to structure the property transfer, depending on your parents' income tax brackets. In any case, capital gains tax will be payable once they are both gone; likely the estate of the last to die will pay all the tax. You should make sure that you have a detailed record with solid documentation for the cost base (the property's acquisition price for tax purposes) and any additions to that cost base. Check to see if a capital gains exemption election was made for part or all of the property in the 1994 income tax filings for your parents.
You may wish to consider the fact that, if you and your brother become joint owners, you will both need to sign the paperwork. One solution may be to establish a trust under your parents' wills that then holds the cottage as well as a portion of their investments that will generate income to carry some of the operating costs and upkeep. Make sure you work with a qualified advisor to achieve this, as there are many pitfalls to some of the more common strategies.
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