Recreational property succession planning with insurance

Insurance solutions can address your family’s unique needs and efficiently help pass cherished family assets to the next generation.

You spend most summers at the family cottage – it’s even where your children learnt how to swim. It holds a lot of sentimental value and, understandably, you feel strongly about keeping it in your family. Unfortunately, passing ownership is not so straightforward. When it comes to recreational property succession planning, there are several tax and estate factors to consider. In this article, we look at how insurance can provide a cost-effective solution to estate planning.

Capital gains tax

Although passing ownership to the next generation is a nice sentiment, if your property value has increased from the time of purchase, your beneficiaries will face the burden of having to pay sometimes substantial capital gains tax.

When it comes to estate planning, one of the most cost-efficient ways to mitigate capital gains tax is through permanent life insurance, where proceeds can be used to cover this tax at death. Let’s use Amy as an example.

Amy wants to pass ownership of her cottage to her children (beneficiaries). She purchased her cottage 40 years ago for $200,000. At her time of death, the property is valued at $1,000,000. The accrued capital gain totals $800,000. Assuming 50% of capital gains are taxable at a personal rate of 53.53%, Amy’s beneficiaries would have to pay $214,120 in capital gains tax. That can be an overwhelming amount of money, and unfortunately, her beneficiaries may believe selling the family cottage is the best way to raise those funds. However, to avoid this outcome, Amy made sure her estate plan accounted for this. To offset the potential tax liability, she purchased a life insurance policy with a death benefit of $200,000, meaning Amy’s beneficiaries can use the full benefit amount to bring the remaining balance down to $14,120. And because of this, they can afford to keep the cottage in their family.

Estate equalization

What if one, or in some cases, most children are not interested in joint ownership of the family cottage? Perhaps one child already has a cottage of their own. Maybe another child lives overseas and won’t be able to use the property to the extent of their siblings. If not decided upon in your estate plan, this situation could potentially cause issues amongst family members. Life insurance can help ensure that all children receive an equal financial inheritance. Here’s how:

Let’s say you have two children, Martin and Omar. Martin is interested in keeping the family cottage valued at $700,000, but Omar isn’t. When it comes to Martin, he can be named as the sole beneficiary of the family cottage in your will. To fix this imbalance, you purchase an insurance policy with a death benefit of $700,000 that pays out directly to Omar. This ensures your assets are divided equally (and equitably) amongst beneficiaries. Even if the insurance policy doesn’t match the cottage value exactly, it goes a long way towards equalizing the estate and both children feeling they have been treated fairly.

Planning to maximize your investment

To capture insurability, and capitalize on lower premium costs, it is generally better to consider insurance strategies sooner rather than later. Insurance solutions can address your family’s unique needs and efficiently help pass cherished family assets to the next generation.

To learn how you can use insurance for recreational property succession planning, contact our office today.

source https://richarddri.ca/recreational-property-succession-planning-with-insurance/