Inheritance problem with a cottage

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Norbert Schlenker
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Inheritance problem with a cottage

Post by Norbert Schlenker »

I was recently on a trip and was asked, with little time to ponder, for a good solution to the following problem. I'm wondering if what I came up with is optimal, and am looking for insights and inspiration.

Fifty years ago, a married couple in Alberta purchase a lakefront lot in BC. They have three young kids. A small cottage is put on the property and provides vacation enjoyment for years. Thirty five years later, both parents are dead. Wills provide that the BC lot passes to the kids as one title, held in joint tenancy. Appropriate capital gains tax is paid. By this time, all kids are married and have kids of their own (hereafter called grandkids). Over the next 15 years, all three kids build a house on the lot for their own families and using their own family's funds. (The location has no zoning or permit restrictions, so the buildings are legal.) The lot is never subdivided, so remains under a single title. Common expenses, such as property taxes or water supply or septic field work or driveway resurfacing, are shared equally when incurred.

At this point, any change in title is a little problematic. There is a substantial unrealized capital gain. BC imposes property transfer taxes on many sorts of transfers. Subdivision may not be feasible in the short run if at all.

Recently, one of the kids is diagnosed with a terminal illness, death expected within two years at most. The kids unanimously agree that the fair thing is not to allow the joint tenancy to govern, i.e. the surviving spouse/grandkids shouldn't be deprived of "their" cottage. How best to accomplish this without incurring immediate huge costs, while avoiding a panicky entry into a solution that won't suit in the long run.

The obvious solution in common law is to sever the joint tenancy, make the kids tenants in common, and let existing wills operate as written. Pros: No immediate capital gains consequences, no property transfer tax under BC rules. Cons: What if the surviving spouse can't be trusted to keep the informal bargain that's held up until now? What if the survivor remarries? Even if one has faith in the surviving spouse, all the kids are getting older so what happens if the tenancy ends up in the hands of grandkids who can't or won't stick to the deal?

A lawyer has suggested a trust. Pros: The kids can agree on almost any set of rules to govern going forward, including ones that restrict a surviving spouse or grandkids. Cons: Expensive up front and ongoing. Definitely capital gains tax. Probably transfer tax. Extra tax return every year. Deemed disposition after 21 years.

I suggested rolling the property into a newly formed CCPC and issuing each kid 900 shares in three different classes (ownership of one class entitling one to occupation of one particular house, but otherwise indistinguishable; 900 shares because it probably takes care of further splits among heirs for a couple of generations). Pros: The kids can write any rules they want, a la the trust, but as a shareholders agreement. No capital gains tax if you use a Section 85 rollover. Avoids 21 year rule. Cons: Still expensive up front, not so much ongoing, still needs an extra tax return every year. Definitely transfer tax payable.

Anybody have a better idea?
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kcowan
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Re: Inheritance problem with a cottage

Post by kcowan »

So would the Shareholder Agreement specify that shares must pass from the kid to his grandkids equally? Would their spouses agree to that provision?
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Re: Inheritance problem with a cottage

Post by Just a Guy »

Subdividing, to me, seems like the best option going forward. You say it "may" not be possible short term, or even long term... To me, that means they didn't really look into it.

I'd leave things as they are right now, and begin exploring that option...the other arguement may be, that the "value" of the non-subdivided may be less (from a capital gains perspective) because the property as-is is not attractive to ther buyers...they may be able to get a lower appraisal justified by such an arguement.

Of course, this solution means that no family maintains control over the others...which may be the true reason why they don't like this option.
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Re: Inheritance problem with a cottage

Post by ockham »

What we have is one f******g dog's breakfast. An absolutely essential urgent first step is to sever the joint tenancy. Should be easy to do and inexpensive.

Troubling about the story from my point of view (which is the view of a retired lawyer) is the ongoing emphasis on "cheap". It's being cheap and thoughtless that created the mess in the first place. There can be no reasonable expectation that there's a cheap solution at hand. What can be said with confidence is that any solution will be cheaper than the alternative --- litigation.
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Re: Inheritance problem with a cottage

Post by Transformer »

At a point some time in the past when I worked for a development company in Vancouver, we wanted to convert several rental buildings to condominums. We needed to get permission from the office of the rentalsman and perhaps other authorities, but such approvals were impossible to obtain. Our solution was to convert the buildings to co-op's. There remained one title, but purchasers had exclusive use and possession of their suite. I cannot remember a lot of the details and of course I was packing a big cheque book. However subdividing via the co-op approach might be an option if you can find a lawyer familiar with the process.
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patriot1
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Re: Inheritance problem with a cottage

Post by patriot1 »

Why not just convert the property to a strata then. No more costly than converting to a co-op and much better options going forward. Lots of recreational property in BC of this type is strata.
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