Wealth Watch: Can we leave the lake house to our children?

Derek: Could we pass on our lake house to our children?

Handing down a vacation property that has been in the family for years can be an emotional and financial challenge. Chances are you have had many wonderful memories at the lake and simply letting it go and selling may not be your preferred option. Often parents wish to keep the cabin in the family by handing it down to their children but this requires some thought and planning.

The first question to answer is to whom the lake house should go to. Often the best solution is to not leave the cabin equally to all children. This may be due to the fact that not all children have the same level of interest in taking ownership. Your beneficiaries may have busy schedules or significant travel time and may find it difficult to fully use the property, or perhaps they don’t have the necessary funds for upkeep. In some cases, children whom you assumed would want to take over ownership are either not financially able, or are not interested in the responsibility. An open conversation should help clear up any misconceptions.

Once you determine who will be getting the lake house, you need to consider if this will somehow create an imbalance in the overall estate. If one beneficiary is getting the property, you should consider how you may equalize the remaining assets to ensure a fair transfer. This may mean that the other beneficiary gets a larger piece of the cash assets from your estate, while the other retains the cabin.

Assuming the cabin is not your principal residence there likely will be capital gains tax payable when it is sold or transferred to the next generation. Capital gains tax applies to the difference between the adjusted cost base (ACB) of the property and its fair market value at the time of transfer/sale. The ACB is typically the purchase price of the property plus any capital improvements that you’ve made. You may want to speak with a tax expert to confirm what tax may be applicable.

Some individuals choose to maintain a permanent form of life insurance on the property. This may be a cost-effective way to pay any of the tax owing on the cabin once you pass away. Life insurance proceeds are received tax free so this may solve the issue of any costs. In other cases, you may use this life insurance policy to pay the other children who are not taking ownership of the cabin. The life insurance payout could therefore help with equalizing the estate. You may even ask that your children pay the premiums on the policy since they will ultimately be the ones benefiting from the final payout. You would need to have a discussion with a qualified wealth advisor to discuss these ideas further.

There may be a solution where you could transfer the property into an inter vivos trust. While beyond the scope of this article, a trust can help ensure the home is enjoyed by your children and ultimately passes to your grandchildren. It can also offer some protection against future creditors or matrimonial claims. Trust arrangements can be complex and it’s important to obtain proper advice before undertaking this step.

Finally, you could make the property “joint” with your children but this strategy does have some pitfalls. First, the transfer will typically trigger capital gains and create a tax bill. Second, you may be exposing the property to creditor or matrimonial claims that may be brought against any of the owners. While these circumstances cannot be predicted, some planning with a professional today should help you avoid the consequences.

The family vacation home is a source of great pride for many people. Having the lake house stay within your family may be your ideal scenario and if so, it’s best to start the conversation today about how to make this happen efficiently so that there can be many more memories to come.

Enjoy your summer,

Derek Fuchs, Senior Wealth Advisor


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