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Learning From Experience: The Carte’s Story

The Carte family had a beautiful lakefront cottage. Lorenzo and his spouse Valentina bought a 2-bedroom rustic cabin, and over two decades, had transformed it into a stately family retreat with not much more than the sweat of their brows and the help of their son Anthony. When Lorenzo passed away, Valentina kept the cottage, so there was no tax liability.

When Valentina died, their children were left with the cottage. Among them were Anthony, who lived for the place, Isabella, who wasn’t keen on sharing property with her siblings, Franca who had a weekend place of her own, and Emmanuel who was an urbanite to the core – not a fan of cottage life. After months of chaotic back and forth, bouts of tears, and expressed fears, in the final analysis, only Anthony was interested in owning the cottage, but his siblings were all intent on receiving their share of its value.

Since the principal residence exemption was not available for most of the years the lakefront cottage was owned, the capital gains tax bill was a whopping $432,000! The Cartes had saved a bundle by doing the upgrades themselves, but even Lorenzo and Anthony’s sweat equity became taxable in the end. The siblings managed to dredge up some old paperwork for improvement costs to reduce the tax bill to $394,000.

In addition to the cottage, the Cartes had also left an after-tax cash inheritance of $1,000,000 to be divided equally among the four children — plenty to cover the tax bill and leave them each a little nest egg.

However, between the tax owing and the current $1,350,000 cottage valuation, Anthony’s one-quarter of the $1,000,000 cash inheritance wasn’t nearly enough to buy out his siblings. In fact, at least three of the Carte children would have had to continue sharing the cottage in order for their cash inheritances to cover the cost of buying out the fourth sibling.

Without sufficient funds, and unable to finance a buyout, Anthony reluctantly agreed to sell the dearly loved cottage, the proceeds of which were first applied toward the tax bill, then divided equally among them.

Consider this...

  • Keep good records when doing cottage upgrades, the cost of which will help reduce the taxable capital gain that will arise on your passing (especially if it does not qualify for the principal residence exemption)

  • Huddle up with your heirs to discuss land transfers – or any shared bequests- to gather their input and communicate a plan on how to achieve your dreams for your hard-earned assets

To learn more about planning for the transfer of your estate, watch our short video INFOclip: Protecting Your Estate and read our article entitled Sharing your Wealth with the Next Generation.