What’s your plan for bequeathing property to your heirs?
For the first time in history, there are more seniors in Canada than there are people under 14, and this trend is only growing as boomers make their way through their sixties. And boomers’ parents are still alive in many cases, to the extent that boomers are set to receive what economists are calling the largest intergenerational transfer of assets in Canadian history.
And you can bet that a sizeable chunk of that transfer is going to be made up of real estate — family homes, rental properties and cottages. Let’s look at some of the challenges and opportunities of leaving real property as an inheritance.
Some basics about bequeathing property
First things first. Are your heirs ready? Do they know what’s eventually coming to them?
An open and honest conversation is the first step in setting up a successful property transfer. You may be surprised by what you learn — maybe your daughter doesn’t actually want the family cottage. Perhaps your nephew doesn’t have the time or willingness to manage your rental property when you are gone.
Wouldn’t it be great to know these things before you pass your prized property to the next generation? You think you’re doing them a favour by bequeathing property, but in reality your relatives could end up feeling resentment after you are gone.
The liquidity issue & joint ownership
Once you’ve got this key step figured out, there’s liquidity to think about. A real estate asset is not something that can necessarily be sold at the drop of a hat, and if for financial reasons it has to be sold quickly or into a slower housing market, it may mean taking a sizable haircut on the sales proceeds.
But why would your beneficiary have to sell if you’ve already had that honest conversation? Well, they could be financially forced to if there’s no cash available to pay taxes at the time of transfer. The transfer of real property can trigger a substantial tax bill, and unlike investible assets, you can’t sell just your living room or kitchen or some part of your property. Your principal residence isn’t subject to capital gains tax, but any other property will be if it’s passed through your will and all of it will be subject to probate (an Ontario estate tax).
It’s essential to ensure that, if it’s important for you and your beneficiary to transition and keep the asset, you are aware of the estimated tax bill and have easily cashable assets to cover this tax burden — bank accounts and insurance proceeds are two of the more obvious solutions.
Now, if you’re thinking of adding your beneficiary as joint owner on your property to alleviate the tax burden, you should first consider the move carefully and talk to a Certified Financial Planner. There are some advantages to creating joint ownership when bequeathing property, but also a lot of disadvantages that could affect your financial situation during your lifetime.
Alright, you’ve had the honest conversation and you’ve planned to cover the tax bill. What other issues could there possibly be in bequeathing property?
Let’s say you’ve got three children. You’ve left the family home to the oldest and the cottage to the youngest, but what about your middle child? The plan is to have the rest of your estate go to her, but what’s that going to look like, especially if you plan on living to 95? Potentially the cottage and home will be worth double what they are today and you’ll have spent everything else, leaving nothing for your poor, forgotten middle child. This concern of equalizing the estate to ensure things are divided fairly among your beneficiaries is becoming a more complex process as families move away from the nuclear family of the 1950s and are increasingly diverse.
For many Canadians, real estate makes up a significant part of their net worth and future estate. It only makes sense to plan for the inevitable by making sure your intentions are clear and by setting up a clean, tax-efficient transfer of real property to your beneficiaries.
I’ve touched only the tip of the iceberg on estate planning for real property. Before you make any decisions or implement any strategies for bequeathing property, be sure to talk to a Certified Financial Planner who will help you through this planning process.
Updated May 31, 2021. Originally published Nov. 6, 2017
The views expressed by the author do not necessarily reflect those of All Things Home. This article is provided as a general source of information only and should not be considered to be personal investment or legal advice, or a solicitation to buy services. Consult with your financial or legal advisor to ensure it is suitable for your circumstances.