FP Answers: Can I leave my estate to my tenants?

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In an increasingly complex world, the Financial Post should be the first place you look for answers. Our FP Answers initiative puts readers in the driver’s seat: you submit questions and our reporters find answers not just for you, but for all our readers. Today, we answer a question from Frank about leaving an estate to tenants.

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Q. I am a landlord and want to put two of my tenants — a husband and wife — in my will as sole beneficiaries. They would inherit my entire $400,000 estate, promise to maintain the property — a sixplex — for 10 years and allow my stepdaughter to live in one of the apartments for 10 years. Can such a will be enforced? Or is there a better way? —Thanks, Frank

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FP Answers: Frank, you are really proposing a contract. If this is your plan, you need to think through how terms and conditions would be enforced. Your will is not a contract. Your two tenants do not sign your will. They may not agree to the terms in your will. What happens next? How can you enforce your terms after you are gone?

Once you give a gift, it is unconditional and cannot be cancelled. You cannot add conditions to gifts that may not be enforceable. Does your will transfer your property on your death? Or only 10 years after you die? Who decides that? What if your chosen executor has died? Are you attempting to control your estate and people from your grave? This can lead to court battles to determine if the terms are reasonable conditions or must be struck from your gift.

Let’s consider other practical problems. Who will be your estate executor to maintain the property and expenses over a 10-year period? What if your sixplex loses money and needs substantial work to bring the property up to current fire standards? Who is going to pay for such capital improvements? Can the property be refinanced to pay for a new roof or fire damage? Who signs the mortgage?

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Family members can make such agreements. They may ignore warnings of potential future problems. Until there is a disagreement, there may be no conflict. However, if disputes arise, lawyers will be needed to take the matter to court.

Unfortunately, leaving the property to your stepdaughter may not be an alternative. What if your stepdaughter does not wish to live in one of the apartments? Is it to be kept empty in case she changes her mind?

You propose a gift to a husband and wife, so you must consider what happens if the couple separates or divorces, or one of them dies. Does the remaining individual live rent-free in the sixplex as an owner? Is this person the sole owner of the property? What if the new owners cannot afford to stay in the property? Can they sell?

Capital gains are to be paid at your death. You are deemed to have disposed of the property at fair market value. How much capital gains tax does your estate pay to Ottawa? Where does this money come from? You must deal with this tax issue as your first challenge.

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All investments in real estate carry specific challenges. Properties have ongoing maintenance and repair costs and tax consequences that must be met. Consider purchasing life insurance to cover the expected income tax and estate costs. Transferring real estate to beneficiaries under your will means transferring these obligations to individuals who may not be willing or able to satisfy them. They may prefer to sell your property.

Edward Olkovich is an Ontario lawyer at MrWills.com. He is certified by the Law Society of Ontario as a specialist in estates and trusts law. This information does not substitute for legal advice.

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