Carissa Giebel column The Family Farm or Cottage
11:00 PM, Mar. 28, 2011 |
Families often have a farm, land or real estate that has sentimental value to their family. Sometimes these family assets have been passed down multiple generations. Other times, this is the first generation to own the asset, but the plan is to pass it down to the next generation.
Too often, the planning required to successfully pass down the asset to the next generation is never done, which ends up causing the family more heartache, time and expenses than necessary. Many owners never consider the potential pitfalls when it comes to passing down a family asset.
The family cottage should continue being a source of joy rather than a source of family bickering, and more often than not, this depends on how it's passed down. I am going to use the family cottage as an example throughout, but you can replace the cottage with your family asset (hunting land, farm, cabin, etc.). When it comes to these special assets, there are a number of factors to consider.
First, you need to know if your children are genuinely interested in the family cottage. Do they live in the area or too far away to enjoy it? Maybe only one child is interested. What if the interested child can't afford to buy the others out? How do you plan to keep things equal? Could the children afford the taxes? Are your children's spouses interested? Do you want them to be part owners? What if there would be a divorce?
You also need to consider the capital gains tax. If you gift the cottage to the children during your lifetime, rather than allowing them to inherit it after you pass away, they will not get a step up in basis, which could be a significant tax loss. Also, consider what could happen to the cottage if you or your spouse would need long-term care. Did you do the proper estate planning to prevent the asset from being subject to nursing home costs?
Here are additional factors you may not have considered: Who is going to make major decisions about the cottage, including the ultimate sale? Maybe voting rights should be put into place. Do you want one child to be able to force the sale of the entire cottage? Who will manage and take care of the cottage? How will maintenance be paid for? What happens if a child or grandchild experiences creditor issues, bankruptcy, divorce, health issues, or has a lien or encumbrance against the title of the cottage? As the next generation comes along, at what point do they get to have their own slot as opposed to sharing with their parents? What if a family member is no longer interested in keeping their ownership interest? How will value be determined? What procedures are in place to resolve disputes?
It's always best to sit down with your children and discuss who is actually interested in the family cottage. With proper planning, there's always a better chance the family cottage will stay within the family and continue to be used for its intended purpose, which is to maintain and strengthen family relationships.