If you own a family cottage or other vacation property, it may not be just a financial asset but an emotional investment for you as well, and therefore proper planning for this special asset is especially important in order to meet all your future goals for it. The financial aspects of estate or succession planning for your vacation property should, of course, be addressed; for example, it is important to ensure there are sufficient cash or other liquid assets in your estate to pay the potentially significant tax liability on your death if there is a long-term increase in the value of the property. However, keeping your family vacation property from becoming subject to claims on marriage breakdown, including a child’s, or other beneficiary’s, can, in some cases, prove even more important.
It is easy to overlook how potential future matrimonial property claims can impact a family cottage. Perhaps this may be because a common assumption is that a couple can have only one “matrimonial home”, which will naturally be their primary residence, whereas in Ontario, under the Family Law Act, a couple can in fact have more than one, even several, matrimonial homes.
A matrimonial home is any home that married spouses, or one spouse and their children, ordinarily occupy as a family home and in which at least one spouse has an ownership interest. An ownership interest can be direct (the spouse is the owner or a joint owner of the property with one or more other owners) or indirect (the home is owned by a corporation in which the spouse holds shares, or by a trust of which the spouse is a beneficiary, depending on the corporate or trust structure in question). The value of each owner spouse’s matrimonial homes is included in the value of their total property when calculating an equalization payment on marriage breakdown, even if the spouse owned the same matrimonial home before the marriage, or if it was gifted to, or inherited by, the spouse during the marriage. Also, both spouses have possessory rights in every matrimonial home if they have no ownership interest in a property, and each spouse therefore has the right to ask the court to allow them to occupy any matrimonial home for a period of time after marriage breakdown.
When a family cottage is also a matrimonial home, these rules can result in the spouse who owns a cottage making a far greater equalization payment on marriage breakdown. In addition, their ex-spouse could have the right to occupy the family cottage for some time after the marriage breaks down, because of his or her possessory rights as outlined above.
Such undesirable consequences, can, however, be avoided if appropriate planning is put in place. Excluding the family cottage from property equalization on marriage breakdown by means of a marriage contract is potentially the most effective means of doing so, but there are alternative planning techniques which can be used, and which do not require an agreement between the spouses. A parent wanting to transfer a cottage to a child could sell the cottage to him or her and take back a mortgage, thereby reducing the value of the property for equalization purposes. A carefully drawn discretionary trust may keep a spouse from acquiring an ownership interest in the property, thus preventing it from becoming a matrimonial home. A parent can ensure that their children enter into a comprehensive property management agreement, including buy/sell provisions on marriage breakdown, by making such an agreement a precondition to the transfer of the family cottage to their children including under their will or trust.
It is advisable for those looking at planning for their family cottage or other family vacation property to seek professional advice, and consider the impact of the relevant family law legislation before implementing any plan. Emotionally charged legal battles over this asset are unfortunately becoming more and more common, but it is possible to avoid or at least minimize the potential for such conflicts with prudent planning, so that those great family memories can keep on coming.
— O’Sullivan Estate Lawyers
Look for our next blog on the U.S. Foreign Account Tax Compliance Act – what is it and why you need to know.
The comments offered in this article are meant to be general in nature, are limited to the law of Ontario, Canada, and are not intended to provide legal or tax advice on any individual situation. Before taking any action involving your individual situation, you should seek legal advice to ensure it is appropriate to your personal circumstances.