Keeping your family haven all in the family

Many owners of vacation property want to pass along the family retreat for the enjoyment of the younger generation. But keeping a vacation property in the family can be a complicated task.

Here's a look at the types of decisions you'll be facing:

Personal and emotional factors

Even though your adult children may currently use your vacation property, it may be a leap of faith to assume that they want to own it.

"Owning and maintaining a vacation property is a big responsibility. It's certainly not for everyone," says Christine Van Cauwenberghe, LL.B and Director of Tax and Estate Planning, Advanced Financial Planning Support at Investors Group. "That's why it's essential that owners talk to their children to see which of them—if any—want a future ownership share."

For example, let's say you leave an equal share of a vacation property to each of your three children. Two of those three want to sell the property and use the proceeds for something else; the third child does not have enough capital to buy them out. The result? The property is sold, with your intentions unfulfilled and one of your children unhappy with the result.

By talking with your children in advance, you can make arrangements to ensure that those interested in inheriting the property are able to do so, and that other assets pass to your other children.

Plan for capital gains taxes

"Unless you're passing assets to a spouse, when you die you're deemed to dispose of all of your capital assets at fair market value," advises Van Cauwenberghe. "If your vacation property has appreciated in value, there could be a significant capital gains tax liability."

You may be able to claim the principal residence exemption on the property but, for the most part, this exemption can apply to only one property. If you want to use the principal residence exemption on your regular city home, the gain on the vacation property will be subject to tax.

One efficient way to cover these taxes, as well as other estate debts, is with permanent life insurance. The tax-free death benefit can be used to cover the tax bill. Without this ready source of cash, your executor might have sell estate assets, including the vacation property, to pay taxes.

Transferring it now

Instead of leaving the property to your children upon your death, you may be able to transfer some or all of the property to them during your lifetime. This can be done by gifting the property to your children, by making one or more children joint owners with you, or by transferring the property to a trust, with your children as beneficiaries.

All three transfer methods will trigger an immediate capital gain. However, future capital gains on the property will accrue to your children and won't become payable until they sell or transfer the property.

A trust also offers the benefits of an independent third party (the trustee) managing the property on behalf of the beneficiaries, even after your death. This can be especially valuable if there are conflicts between the children, or if one or more children isn't ready to take on the responsibilities of ownership.

Consider the big estate picture

If you are considering any change to the ownership of your vacation property, make sure you coordinate the change with other aspects of your estate plan. Your actions may have unexpected implications for you, your beneficiaries and your estate.

Talk to your Investors Group Consultant for more information as it relates to your personal situation.

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This article, written and published by Investors Group Financial Services Inc., is presented as a general source of information only and is not intended as a solicitation to buy or sell investments, nor is it intended to provide professional advice including, without limitation, investment, financial, legal, accounting or tax advice. For more information on this topic or on any other investment or financial matters, please contact your Investors Group Consultant.