Inheriting the family home is a privilege, but unless you are an only child, estate planning is required to avoid misunderstandings during this already stressful time.
“Before this even becomes a discussion amongst siblings, now is the time to have that talk with the whole family [when the parents are still alive],” says Andrew Sherbin, financial advisor with Edward Jones in Toronto. “If one of the siblings wants to move into the family home, then the discussion needs to begin in advance. How is that sibling going to fund the move?”
Mr. Sherbin says the wishes of the parents and each child can be very different. Thus, it is important to seek legal advice and have an up-to-date will that clearly states your wishes for the property.
Once the question of who gets what has been settled, the financing for the sibling who wishes to purchase the family home need not be complicated.
In such an instance, “I work with the client and the lawyer and treat it like any purchase,” says David Gibson, a mortgage planner with Mortgage Intelligence in Sudbury. “When you’re purchasing a home from the estate or from the parents, the first step is to discuss the downpayment,” he says. “If a house is worth $300,000 and there are three siblings, for the sibling who is going to purchase it, the downpayment is $100,000. The source of the downpayment is the estate or a gift from the living parents.”
As with any inheritance probate and other costs will need to be factored into the estate planning. If the property being inherited was the principal residence, then there will not be a capital gain to pay. However, if the property is a cottage or other second residence there will need to be a financial plan to pay for the capital gain.
“One solution is to buy life insurance that will cover off the potential capital gains taxes due,” Mr. Sherbin says. “That way that money comes on the death of the second spouse. It’s tax free, [the siblings] use the money to pay off the tax due on the death of the second spouse.”
If the siblings decide to hold on to the former principal residence after the death of their parents, any gain in value from the time of death of the second parent until the siblings sell will attract a capital gain unless it becomes the siblings’ principal residence.
Mr. Sherbin says the financial plan should specify what is to happen if the parents need to sell the family home before death and perhaps move into assisted living.
“There should be some sort of power of attorney for property or finances or a living will also in place,” Mr. Sherbin says. “If the parents sell the home and it is now in cash or investible assets, there could be future capital gains due because they have sold their primary residence and perhaps are now renting or in a care facility.”
Mr. Gibson says in order to be able to plan their finances and to avoid any nasty surprises at the time of inheritance, the siblings need to be fully aware of any mortgages or other loans their parents may have on the property.