Creating an Ontario Cottage Family is common at this time of year. Cottage owners can achieve many benefits by holding their cottage property with a family trust.
A trust is, in essence, a relationship. There are three main parties in a trust, (1) the settlor (2) the trustee(s) and (3) the beneficiaries.
The settlor “settles” the trust, transfers the cottage to a trustee or trustees, and the trustee or trustees then hold and manage the cottage for the benefit of the beneficiary or beneficiaries. Thus, the trustees would legally own the land, but the beneficiaries would be entitled to use the land and assets.
A family cottage trust can be set up when the cottage is acquired, upon death through a will, or during the lifetime of the cottage owners.
The family trust structure can have many advantages. First, it can reduce probate fees. If a family cottage is owned directly by parents (instead of a trust), and upon their death they intend to pass the cottage onto their children, then the value of the asset would be included for the purposes of calculating probate fees. The value of the property today may be significant, even if the family cottage has been in the family for years. If the cottage asset is transferred to a family trust prior to the death of the owners, then probate fees would be minimized by the value of the cottage.
In addition, there is a capital gains tax payable when a cottage property is sold or transferred to a child as part of an estate. The capital gains tax is payable by the estate and due at the date of the deceased’s date of death tax filing. In some cases, the amount of this liability is so large that the estate is forced to sell the cottage to pay for this capital gains tax. If a cottage property is held through a family trust, then the capital gains tax would be deferred until the trust is wound up, and at that time the capital gain would be shared by the beneficiaries equally. A trust would therefore minimize the taxes payable by any one individual.
Holding the cottage by way of an ontario cottage family trust would also protect the assets from the creditors of any one individual and it can insulate a property from a matrimonial dispute. A family trust can also preserve the property for future generations. The family trust should establish rules for the cottage by determining how the property will be maintained and repaired, dictate who can use the property, and how it will be operated. This can minimize many family disputes as a result.
However, it is important to remember that a family trust can only live for 21 years, at which point there is a deemed disposition, creating a taxable event. In order to prevent a deemed disposition, trustees should distribute the assets and wind down the trust prior to the 21 year anniversary of the trust. It is important to discuss the family trust with the beneficiaries prior to establishing this ownership structure, since the beneficiaries should be ready to take over the property before the 21 year anniversary. It is also important to note that transferring property to a trust can also trigger a capital gain, which is why it is advantageous to purchase a cottage property with a family trust.
Conduct Law is an Ottawa based business law firm with locations in Ottawa, Barrhaven, Kanata and Winchester. Our professionals are experienced business lawyers who can help with corporate, estates, commercial real estate, or implementing corporate structures that assist with tax planning, whether as an operating corporation, holding corporation, partnership, family trust, testamentary trust, or many other types of legal entity depending on your legal corporate requirements.
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