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April 16, 2018 | The Inheritance

A best-selling Canadian author of 14 books on economic trends, real estate, the financial crisis, personal finance strategies, taxation and politics. Nationally-known speaker and lecturer on macroeconomics, the housing market and investment techniques. He is a licensed Investment Advisor with a fee-based, no-commission Toronto-based practice serving clients across Canada.

What a sob story. And a lesson.

Christine moaned to one of the Van papers that the house which has been in her family for eight decades must be sold. Mom died at 87 and left it to her five children-beneficiaries, Christine included. The trouble is the place granddaddy Domenic Liberto built in 1939 is now worth $1.7 million, because the world has lost its mind.

None of the five kids can afford to accept the house, since doing so would mean each of the other four must receive their $340,000 share. Christine lived in the place for two decades caring for mom, but she’s not willing to walk into a $1.36 million mortgage to pay off her siblings. Thus, the listing.

“The sad thing is the home is 80 years old and it’s been in our family from when it was built — it’s the first time selling it since my Grandpa built it. We tried to buy it. We’ve been saving like crazy and, of course, my inheritance on the house would have brought the price down a little bit more, but there’s just no way we can afford a home at that price right now. In our 60s now, we don’t want to consider a big mortgage for a long period of time.”

With real estate values in many places off the chart, passing on a house or a cottage is way more complicated than in the past. If there are multiple kids left behind, then not figuring this out in advance can lead to conflict, heartache, financial hardship and splintered families. As this blog has said before, money changes everything.

Christine’s family must give up the home they’ve had for 80 years. The reason? It’s worth $1.7 million and her mom made a mistake.


So what could C’s mom have done to keep the pile of sticks in the clan?

Of course she could have transferred ownership of it to one child prior to death, but that wouldn’t have solved much. The lucky kid would still have to mortgage the place at 80% LTV to pay off the others. She could have changed the deed to put them all on title, allowing one kid to live there as a part-owner. But that would require an agreement between siblings so one could not trigger a sale without consent. More importantly, if any of the kids already have homes, putting them on title would trigger capital gains tax in their hands (you can’t have two principal residences). Bad idea.

A better option is to use insurance. After all, everybody knew mom wouldn’t live forever and that the family home had appreciated wildly in value. So by insuring mom’s life enough tax-free money could be generated from an insurance policy to pay the other four kids a few hundred thousand and leave C the house with a more modest mortgage in return for her two decades of care-giving. Of course it’s only fair that Christine would pay the hefty insurance premiums in order to reap the benefit. But it would hang onto the asset.

To insure someone else’s life you need their consent, plus an insurable interest in that life. That means if they were to croak, you’d suffer a loss. So, taking out a policy on a friend or colleague who enjoys a Donald Trump lifestyle and you believe is doomed won’t cut it. Insuring your spouse or your parents (or your business partners) is okay.

Using insurance to deal with a cottage transfer is a sound strategy, too. A rec property is not usually a principal residence so all of the appreciation over years (or decades) is likely subject to capital gains tax. If a parent puts a child on title, it’s a taxable transaction. So better for the elder to retain title and the child to pay premiums on a policy great enough to handle the tax when the inevitable occurs.

If there are multiple siblings involved, the parents can take out a last-to-die policy which will pay out a tax-free wad to some kids while another gets the real estate. Everybody’s happy. No family meltdown. No lawyers fighting. Harmony.

Key to all of this is planning. Don’t die without a will. Don’t appoint your children as executors (if you want it done correctly and fairly). Have a strategy for passing on real estate and other capital assets, like an investment portfolio (you can give money tax-free, but not stocks). Make sure you and your spouse exchange POAs for each other, then have secondary ones done to cover all eventualities.

Talk to your adult children about what they want and expect. Just saying your estate is to be divided equally can create a quagmire and heartbreak, as Christine will attest. Get some help to figure this out – a good advisor doesn’t just manage money, but will also organize your life. Even your death.

Or you can buy a Harley, blow it all and check out with nothing but a smile. Maybe the kids were overrated anyway.

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April 16th, 2018

Posted In: The Greater Fool

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