* Financial issues just tip of iceberg, emotions also key
* Can lead to planning for other generations of family
By John McCrank
TORONTO, May 21 (Reuters) - Like ten of thousands of other Canadians, three generations of Michelle Munro’s family are heading up to their vacation cottage over the long Victoria weekend, the unofficial start of summer.
But unlike many, the family will spend part of the weekend discussing a topic that too many avoid: how to hand down the summer home from one generation to the next.
The tax implications of what they decide to do, or don’t decide, are huge. Munro’s mother-in-law bought the place in the 1960s for C$2,000, but it’s is now worth considerably more.
But there is no simple formula. Much depends on the fair market value of the cottage. How much capital gains will be owed when it changes hands? Who will pay them? Will it be bequeathed, gifted while alive, or sold at a discount to the children? Do the children even want the cottage?
So goes the conversation. But Munro is not the average cottage-goer. She’s director of tax planning for Fidelity Investments Canada in Toronto.
For those not versed in the often complicated rules of taxation, financial advisers can help navigate what could prove to be a financial minefield, Munro says. Advisers can also offer an impartial voice in what is often an emotionally charged family issue.
David Christianson, a fee-for-service financial planner and portfolio manager with Wellington West Total Wealth Management in Winnipeg, knows this firsthand.
One of his clients, an elderly widow with six children, had a cabin in a remote area that had not appreciated much in value, so the tax wasn’t the issue.
“There are six children, all of whom have children of their own, all of whom enjoy the family cottage, and the issue was how do we pass it on in an orderly fashion and create an infrastructure where they can all share and enjoy it without killing each other,” he said.
Christianson ended up helping the family transfer the cottage, along with a maintenance fund, into a trust. With it, he helped draw up a plan for decision-making and scheduling of cottage use.
While the capital gain was not that large, Christianson, whose average client has a net worth of over C$2.5 million ($2.4 million), was able to offset some of it by moving around some investments — this was 2008, when the markets were in turmoil — and crystallizing capital losses.
In another case, the vacation home was in a more sought-after area and had appreciated much more in value.
The clients were a couple in their mid-60s with three children, only one of whom lived in the same city. That child was at the cottage every weekend, did all the work, helped build the addition and, as a result, expected to be the one who would inherit the cottage.
The parents wanted to be fair, but feared that bringing the topic up with the kids would open up a big rift.
Christianson, over the course of two years, convinced them to have separate conversations with each the children, to find out which ones actually wanted ownership of the cottage.
In the end, the out-of-towners agreed that their other sibling was much more invested in the property and it wouldn’t be right for all three of them to have ownership.
Part of the solution included setting up a joint and last-to-die life insurance policy to assure enough liquidity to pay the taxes when the cottage was bequeathed and keep the property in the family.
“It can result in tremendous goodwill with the clients if you solve an issue that’s been haunting them, and it may result for life insurance-licensed advisers, in a large, permanent life insurance sale,” said Christianson.
Getting to know the family of your clients is another benefit to helping plan cottage succession, said Tina Tehranchian, a certified financial planner with Assante Wealth Management in the Toronto area,
“As an adviser, you want to be able to do intergenerational advising,” she said. “You want to keep that wealth under your management as it passes from one generation to another and the best way of doing that is establishing a line of communication with the next generation,” she said.
“The sooner you do it the better — the more comfortable they will feel with you. And also, the unexpected can happen at any time, and if you wait and say I’ll do it five years later, well you may never get that opportunity.”
Tehranchian, whose clients are typically 40 to 60 years old, with investable assets over C$250,000, agreed that the issues surrounding cottage succession are rarely thought out before the adviser becomes involved.
“I honestly haven’t had too many cases where clients come and specifically want to plan around the cottage,” she said. “I ask them, did you know about these tax issues, and it’s complete news to them.”
$1=$1.06 Canadian Reporting by John McCrank; editing by Frank McGurty and Rob Wilson