Ross and Paul are brothers in their early thirties. Both are successful – Paul is a senior tech executive in California’s Silicon Valley and Ross runs a thriving commercial landscaping business in Ontario.
Their father is a retired widower in the early stages of estate planning. Most of his estate will be divided equally between his two sons and the remaining balance will go to nieces, nephews and a couple of charitable organizations. The disposition will be fairly straightforward, involving the sale of assets – including the condominium where the father now lives, stocks and bonds in an investment portfolio, a car and some artwork – and the distribution of cash in a savings account.
The challenge: Equal love, but unequal use of the family cottage
Things get more complicated when the family starts discussing the cottage. Both sons love the cottage, and the father would like to give each of them equal ownership. The challenge? Paul, the son who lives and works in Silicon Valley, doesn’t use the cottage as frequently as his brother does and is concerned he’ll end up paying half of all costs to own and maintain it while getting less than half the benefits of cottage ownership.
How does the patriarch give each son equal ownership in a cottage they both love while ensuring a fair distribution of the burden of cottage ownership?
What we did for this family
What started out as a question about passing down the cottage expanded into a conversation about tax planning, ownership agreements and insurance. Here are some of the issues we discussed:
How will Paul’s U.S. tax status affect his inheritance? No doubt Paul will need more planning. He’s currently under the threshold for federal inheritance tax and there is no state tax in California where Paul currently lives, but that could change. Paul is not sure that he will stay in California (or in the U.S. for that matter) but it’s important for him and his father to be aware of potential tax liabilities from monetary gifts. For example, if the father decides to give his sons part of their inheritance while he’s still living, that may trigger a gift tax for Paul.
§ Can the brothers come to a fair arrangement with the cottage? If both brothers accept equal ownership of cottage but one uses it more than the other, it would be fair to come to an agreement where the brother who uses it more also pays more of the ownership and maintenance costs.
§ What happens in the future when one or both brothers want to sell the cottage? The solution for this can be as simple as one brother buying out the other. But as we’ve seen happen from time to time, sometimes family members disagree about the value of the cottage or will downright refuse to sell it. These are the contingencies that should also be addressed in a cottage ownership agreement.
§ What about spouses and extended family members? Most families want to keep ownership of their cottage “in the bloodline.” But as their adult children get married, they face the risk of divorced spouses laying claim to the cottage. This is where pre-nuptial agreements and trusts come into play. This was part of the discussion was not an easy one – one of the sons is married and the other is engaged – but it helped to have us there as an external, objective party.
§ Strategic use of life insurance. As part of tax and estate planning, we put insurance on the father’s life: two separate policies owned by Ross and Paul (one each) that will suffice the buyout of the brother’s share in the future and a smaller one owned by the father to cover the potential tax liabilities and other costs that would otherwise be charged against the estate.
We didn’t go solo
While it was Rubach Wealth that created a comprehensive financial and estate plan for the father, as well as a financial plan for each of the sons, we also brought in other trusted advisors to support these plans.
We consulted two lawyers: a tax lawyer with experience in cross-border tax and estate planning, and one who specializes in cottage ownership agreements.
The father now has an estate plan that includes the passing down of the family cottage to his two sons. The most emotional aspect of the process for the father was the discussion around protecting the cottage from claims by divorced spouses. The father associates the cottage with so many happy summers when his wife was still alive. Now he feels at ease knowing the cottage will stay in the family.
The brothers are currently working on their cottage ownership agreement. They’re looking at historical information to see how often each brother has used the cottage in the last five years, and will also be tracking usage over the next couple of years. This will help them come to a fair agreement based jointly on usage and ownership.