Law Times

Page 8 January 19, 2015 • Law Times www.lawtimesnews.com Inherited cottages a complex issue Agreements key to avoiding disputes among siblings By marg. Bruineman For Law Times eaving a piece of real estate in a will isn't an unusual move, but complications can arise for the beneficiaries. A typical problem occurs when someone leaves a cottage or a vacation property to multi- ple family members, says lawyer Peter Neilson. Instead of passing on the great memories attached to the property, when more than one person receives it in an in- heritance the unintended result could be a significant burden on the beneficiaries. "The implications of sharing a piece of property gets rather complicated," says Neilson, a partner at Shibley Righton LLP who practises real estate and commercial law. "In many cases, it makes sense to sell the cottage." But families attach a great deal of sentimentality to cottage and vacation properties and hope to extend those memo- ries to the next generation. The goal, therefore, is to find a way the family can share the cottage, minimize the taxes, and avoid conf licts. The task is often not an easy one, particularly when the objectives of one sibling don't necessarily match up to those of the others and their re- spective spouses. Two immediate problems Neilson sees when beneficiaries inherit a property involve pro- bate and the capital gains that are often unintended conse- quences of a kind gesture. If the cottage has been in the family for several years, there may be a large, unrealized capital gains tax attached to it. It likely won't be exempt given that there's usually a principal residence to which the single exemption al- lowed applies. "Some people have had cot- tages in the family for 40 years and the value certainly will have gone up," says Neilson. "If you don't have other cash in the estate . . . you may have to sell the cottage to pay the tax." When the cottage passes on as a gift, the adjusted cost base is the fair-market value at the time. The other complication is a practical one: How do two or more siblings who inherit a prop- erty share it? One sibling may live closer and want to use the cottage more or there may be those who are unable to pay their share of the maintenance costs. "It's an area that is rife with traps," says Robert Saunders, managing partner at Basman Smith LLP where he practises trust, real estate, and commer- cial law. "I think what you need to have in place is a co-own- ership agreement . . . whereby the new owners of the property agree on how it is run." Sitting down with all of the new co-owners will help define the relationship between them and how they use the property. A detailed and lengthy agree- ment signed by everyone in- volved could make a big differ- ence in managing the property. In addition to laying out how the owners will use the cottage, it can determine who has ac- cess to it and when by assigning weeks or months to all of the family members on a rotating schedule. "We strongly recommend that the kids get a co-owners agreement. . . . It deals with all these things," says Corina Weigl, a partner at Fasken Martineau DuMoulin LLP. She likens it to a shareholders agreement. The agreement articulates how co-owners can end their ownership, the process for valu- ation, and how a sale or acquisi- tion takes place. It also details the ownership breakdown. There may be pro- portional shares or all of the siblings may own the property equally. As well, the agreement can take into account what hap- pens upon the death of one sib- ling or if one decides to bow out. Do the beneficiaries then ac- quire the outstanding share? Is there an option to sell to a third party or does the interest simply end with the person's death? The agreement includes a fi- nancial plan to ensure bill pay- ments, sets out a way to deal with unforeseen events, and cre- ates a scheme to determine what happens when someone doesn't pay. That could include losing the assigned use of the cottage. There's also a maintenance plan that includes setting out the goal of what all of the fam- ily members want the cottage to be. Does it remain a quaint, old place or is there a unanimous desire to renovate it into the dream vacation home or family compound? "What you have to say is, 'We have to have some kind of pro- tocol process in place on how we're going to deal with what life throws at us,'" says Saunders, who likens the agreement to a marriage contract drafted dur- ing the marriage when there's very little leverage left and not as much give and take as there might have been beforehand. Saunders says families can avoid that entire process through the creation of a trust to hold the cottage by the par- ents either during their lifetime or in their wills to deal with it after their death. The trust lays out the terms in advance. The downside is that it could include adverse tax consequences and additional costs. It does, however, provide a framework for the next gen- eration that can address many of the issues that would otherwise be a source of dispute. Saunders' advice for lawyers drafting the will is to explore with their clients what happens next and advise the parents that they can inf luence how the ben- eficiaries use the property in the future. "You can go a long way to re- solving these issues in advance. It becomes harder afterward," he says. Often, according to Neilson, the new owners end up selling the property as not all of them want to manage it in the same way. "Sometimes the right deci- sion is to sell it beforehand," says Neilson. "That simply adds to the value of the estate." LT Despite families' attachments to their cottages, leaving them to multiple beneficiaries can create significant complications. Photo: Anastasija Popova/Shutterstock Focus on Real Estate Law How the legal community in Ontario gets its NEWS To order your copy visit www.lawtimesnews.com or call 416.609.3800 or 1.800.387.5164 SUBSCRIBE TO LAW TIMES TODAY! Cutting-edge legal affairs, news and commentary for just 50 cents a day! Make time for Law Times and keep up with all the developments in Ontario's legal scene. SUBSCRIBE TODAY AND RECEIVE: t 40 issues a year covering Ontario's legal landscape t FREE Unlimited access to Law Times digital editions and digital edition archives t FREE Canadian Legal Newswire, a weekly e-newsletter from the editors of Law Times and Canadian Lawyer FREE Digital edition included! To order your copy Untitled-5 1 2015-01-13 2:57 PM L

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