How to make sure your children keep your house after you die

Living (living) trust

Living trusts or inter vivos trusts that are established during your lifetime are most commonly used for tax reasons. People may use a trust to take out a loan at a stated interest rate to split income with low-income family members, or to add a lifetime capital gains exemption (LCGE) if they plan to sell the business in the future. Neither applies to your case.

If you are 65 or older, you can choose another self-trust, which is most commonly used to avoid probate for large estates in high-probate provinces such as British Columbia, Ontario or Nova Scotia.

I would probably not use a living trust so that your children don’t have to pay to keep your house after you die, Annette. Maybe a testamentary trust.

testamentary trust on death

A testamentary trust takes effect after your death. You can create one or more trusts for different beneficiaries, and you can leave a percentage of your estate or specific assets in the trust.

To achieve your goals, you can trust your home to your children along with a certain amount or percentage of your inheritance so that there is cash available for ongoing maintenance and upkeep.

Taxes on your home after your death

If the home is your primary residence, you generally don’t have to pay taxes upon your death, Annette. This assumes that no other real estate was claimed as your primary residence during the years you owned the property, and that you did not use a substantial portion of the home for rental or business purposes.

If your home is located on a large tract of land, the deemed disposition (sale) of the home upon your death may have some tax implications because its full value may not be tax exempt when using the principal residence exemption.

Cottage and farm planning

It may be more common for people to entrust their cottage or farm to a trust to maintain the property. This helps ensure that the property belongs to the family.

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More likely, taxes will be payable on death at the cabin or farm. If another property is claimed as the deceased taxpayer’s principal residence, the cottage may be subject to capital gains tax. The farm may or may not be taxable, as the $1.25 million farm lifetime capital gains exemption may apply under certain circumstances.

What do children usually do when you die?

If your children are minors or still live at home, it may be beneficial to have your house in trust for a period of time—for example, until your youngest child is 25 years old. This gives them a chance to find their feet and start a life without having to move out.

If they are under the legal age, a guardian will be required to live with them. Maybe this is part of your will plan, Annette.

To play devil’s advocate, though, I have to challenge your notion that your children will want to keep your house. Sometimes parents think their children will want to keep a certain asset – such as a house, cabin, or farm – because they believe it has as much sentimental value to their children as it does to them.

They may love it and they may miss it if it goes away, but really, kids need to live their own lives too. If selling an inherited asset allows them to buy their own home or realize their dreams, they may ultimately choose this path.

Depending on your goals and family situation, conversations with your children may help you determine this and save you the trouble of making unnecessary arrangements.

Keep the house as a rental property

You might think they would keep the house as a rental property. They can choose to do this, but your children will most likely have unused Registered Retirement Savings Plan (RRSP) and Tax-Free Savings Account (TFSA) room, or they could pay off the debt through an inheritance.

While real estate prices have risen significantly in some cities over the past generation, the upside potential in the next generation may be more limited. Plus, not everyone is keen on becoming a landlord – especially their siblings. It’s a lot more work than buying and holding boring stocks, exchange-traded funds (ETFs), or mutual funds.