Creative Planning For The Transfer Of Family Real Estate
by Richard H. Goldman
The transfer of real estate to children upon the death of the last to die of their parents can lead to unexpected problems for the children. It is not uncommon for parents’ estate plans to provide that upon the death of the last parent to die, their real estate shall be distributed to their children equally as tenants in common. However, problems arise when the children cannot agree upon the disposition of the real estate. This article offers suggestions for provisions to be included in the estate plans of parents so that such disputes can be avoided.
Right of First Offer
One way of addressing these issues is to include in the parents’ estate plans a “right of first offer,” applicable to each parcel of real estate that is to pass to their children. A right of first offer is a contract provision that enables one joint owner of property (“Potential Seller”) to offer to sell his or her interest in the property to the other joint owner (“Potential Buyer”) for a price specified by the Potential Seller (“the Specified Price”).
Within an agreed period of time, to be specified in the estate plans, the Potential Buyer may elect (a) to purchase the Potential Seller’s interest at the Specified Price; or (b) agree that the Potential Seller can sell the Property for a price not less than what would provide the Potential Buyer the amount he or she would have received if the Potential Buyer had sold his or her interest to the Potential Seller for the Specified Price.
If the Potential Buyer does not timely elect to purchase the Potential Seller’s interest at the Specified Price, or having elected to purchase, does not complete the purchase within the permitted time, then for a subsequent specified period of time, the Potential Seller can try to sell the Property to a third party for a price that would cause the Potential Buyer to receive not less than the Specified Price for his or her interest in the Property.
By way of example: Assume that a husband and wife have two children. They own two homes, one in Massachusetts and the other in Florida, each with a value of $1,000,000. Their estate plans provide that upon the last of them to die, the balance of the estate, including the two homes, is to be distributed to the two children equally as tenants in common.
The two children agree that the Massachusetts home will be sold, but one child wants to sell the Florida home and the other child wants to retain it. The estate plans do not contain any guidance as to how to resolve the situation if the children do not agree on the disposition of the homes. The children consult their respective attorneys and are advised that either one can commence a partition proceeding which could be expensive and adversarial.
A better solution is for the parents’ estate plans to set forth a right of first offer. The parents’ estate plans could provide that if the children cannot agree on the disposition of the properties, then within 90 days after the death of the last parent, either child can notify the other in writing that the property should be sold for a price which he or she specifies, in his or her sole discretion, in this example, $1,000,000. The child who receives the notice then has a specified period of time after the receipt of the notice to elect in writing to buy the interest of the other party for $500,000, and to complete the purchase within the period of time stated in the estate plans. If the recipient of the notice does not elect to purchase the interest of his or her sibling for $500,000, or to complete the purchase within the applicable time period, the party providing the notice can sell the property to an unrelated third party for not less than $1,000,000 within a time period specified in the estate plans. If a sale of the property is not completed to a third-party within the agreed time period, either sibling would continue to have the right to utilize the right of first offer in the future.
Offer to Purchase for at Least Federal Estate Tax Value
There are other alternatives that can achieve the same result as a right of first offer. The estate planning documents can provide that following the death of the last parent, either child can offer to buy a property owned by the parents for not less than the federal estate tax value of that property. The estate’s attorney would prepare a purchase and sale agreement at that price. If only one child is interested in purchasing the property, that child could then submit a written offer to purchase to the estate for the federal estate tax value, accompanied by a check payable to the estate equal to 10% of the purchase price and a signed copy of the purchase and sale agreement.
If each child would like to purchase the property for not less than the federal estate tax value, each child submits a written offer to the estate with his or her offer, accompanied by a 10% deposit payable to the estate and a signed copy of the purchase and sale agreement. The child who offers the highest price would be the purchaser of the property at the price offered by him or her.
If neither child is interested in purchasing the property from the estate for at least the federal estate tax value, the Personal Representative will sell the property on behalf of the estate.
Right of First Refusal
In some cases, clients have been advised to use a right of first refusal instead of a right of first offer. While a right of first refusal can lead to the same result as a right of first offer, a right of first refusal brings with it some potential problems. In a right of first refusal, one of the children could negotiate a sale with a third party but would then have to come back to the other child and give that child the right to purchase the property at the price offered by the third party. It can be difficult for a seller to deal with a third party if that party knows that the seller cannot complete the sale without first offering the property to the other child at the price offered by the third party. For this reason, the right of first offer is a better solution than the right of first refusal.
It is important for lawyers to recognize problems that may arise when family real estate is transferred from parents to their children. The right of first offer is a tool available to estate planning attorneys that can be used to plan for the transfer of real estate from parents to children and minimize any potential conflicts.
Richard Goldman is Senior Counsel at Sullivan & Worcester LLP in Boston. He is an Adjunct Professor at Boston University School of Law and is Vice President of the Wesleyan Lawyers Association.