|
FAMILY PROPERTY
CO-OWNERSHIP
RECIPE FOR
DISASTERS, PRESCRIPTION FOR CURES
INTRODUCTION:
The brother was
clearly embarrassed and upset to be sitting in a law office talking
about the internal dynamics of his family. His parents had bought the
apartment building property when he was a teenager and his aged
mother-widow still lived in one of the units in the six unit apartment
building in a nice neighborhood. The brother who sat before me…I’ll call
him Bill…was the eldest of three children and his younger sister and
brother had let him manage the rental aspects of the property for a
decade, getting a small stipend from his mother for the extra work.
The mother now
needed to move to a full care facility and it was going to cost a good
deal of money. The mother, to avoid
probate costs,
had not used an inter vivos trust but, sadly, had simply transferred the
property to the children equally some years before with the stated hope
that she could live in the building until she died. Now she had to move
and Bill wanted to sell the building to pay for the costs of her care.
His sister, Alice, agreed readily. His brother, Ben, who was starting a
business and needed cash, was willing to agree to the sale…but only if
he received what he considered his share of his allotted cash from the
sale. Which meant that the cost of Mom’s care in the facility might not
be handled from the remaining cash from the sale.
“It’s Mom’s
building. I don’t care how title is held, we all knew she had first
rights to how it would be used. My brother seems to think he can get his
share of the building’s sale proceeds…but in reality it’s all Mom’s and
should be used for her care, not for his business.”
I leaned back,
knowing the answer to the question before I asked it. “Did any of you
put that understanding in writing? About your mother having the right
to direct the use of the building or its proceeds from sale?”
“Of course not.
We’re a family. A close family. We don’t need contracts. Never even
occurred to us.’” Seeing my expression, he continued, “Look, we’ve all
helped each other out whenever we needed it. Mom, Ben, Alice and me, we
are all used to working as a close knit family. It’s not Ben who is
causing problems. It’s Samantha.”
“Samantha?”
“His wife.” He
started to say something more but stopped himself and paused, then
leaned forward. “You have to find a way to make Ben come to his senses.
He knows what he should do. Alice and I want the house sold, the money
put aside to pay any costs of my Mom, and when she dies, we split what’s
left equally. That’s how it was supposed to be.”
“’Supposed to
be’…you mean there was some kind of real understanding? A formal
agreement…a clearly stated agreement that this would be done?”
He seemed
exasperated. “You still don’t get it. We don’t need formal agreements.
We’re a family. We talked about it over in a general sort of way during
dinner many times. It’s like an oral agreement, I guess. Informal. No
one really said what would happen precisely…but we knew we’d be taking
care of Mom and the building was part of it.”
Now I was getting
exasperated. Property agreements were complex written documents drafted
to avoid the very issues he was presenting to me. “What was the actual
stated understanding you feel existed about the building and your
mother’s care?”
He shook his head.
“I don’t mean we really went through scenarios or the like…we just knew
that somehow we would take care of Mom and the building would help pay
for it and we’d find a way to do it. Can’t that be enforced?”
“No actual plans
made? No commitment specifically given by any of the children?”
“Not specific. I
mean, you don’t like to talk of those things when your Mom is just
sitting there listening...talking about her being senile soon or getting
sick. We just sort of talked around the topic.” He shrugged. “But we
knew. We didn’t have to say it…but we knew. If he hadn’t divorced and
found this new lady…well, it would have been different.”
“I’m sure it would
have. But with sixty percent of marriages ending in divorce, the odds of
that happening were pretty high, you know.”
“Yeah, I know. And
now Alice may be facing the same thing.” He laughed without humor.
“Ben…Alice…who next? But can you help my Mom in all this?”
I wondered where to
begin. He wanted to hear good news. I had none. We could perhaps sue
the brother for
fraud
in inducement of the transfer of the home...and truly destroy the family
forever. Also, since his brother had not actually promised anything the
case would be weak. Perhaps we could argue that all along he knew he
would keep the building his mother transferred regardless of her need. I
didn’t think fraud had really occurred but who knew what he was
thinking?
With property, it
would be nearly impossible to enforce a
verbal agreement
under California law even if there had been some type of real verbal
understanding. What they truly needed…a written agreement carefully
crafted to meet their unique family needs…was out of the question now
that the emotions had risen to this point.
The silence
lengthened. At last I sighed. “Unfortunately, you’ve come to me far too
late. We can fight…in the United States one can always sue just about
anyone. We do have crude weapons that can destroy your family or we
could, instead, try weak persuasion. You say there was a vague oral
agreement you want me to enforce. Well, let me tell you an old lawyer’s
saying: “An oral agreement is worth the paper it is written on. If you
want to go to Court, we will probably lose and we will certainly destroy
the family.”
“Destroy the family?
What do you mean?”
“With no agreement
we can sue your brother for fraud. Accuse him of trying to steal from
your mother by tricking her into transferring the property…Maybe even
claim he violated various provisions of the Abuse of Elder Act…”
“But that wasn’t
what happened. He never asked for it, she just gave it to him. To save
the cost of a formal probate. It was to save costs for the whole
family...But now he won’t help her.”
“Legally, he now
owns a third of the property and he cannot be forced to give any of it
back. You have the right to sue for
partition
which means the Court can force a sale and he gets his third
in cash…none to your mother. You have the right to make him contribute
one third to the upkeep of the property…but that does not help you.
But…you have no right to make him give up a dime to your Mom. You have
no right to even borrow on the property without his consent and he will
want to take money out for his business if you do. You are
tenants in
common under the law and the rights you have are for
contribution and partition. That’s it.”
“I can’t believe
that’s all we can do…What did we do wrong, then?”
“You want rights and
obligations for a particular type of joint ownership?” He nodded. I
leaned forward. “You have to write the right contract or create the
right structure. What you did was transfer property and make some
nonbinding promises to one another in a vague sort of way. What did you
do wrong? You didn’t set it up right and now you want to make it work
right and your brother has all the power and incentive to say no.”
He stared out the
window for a while. “I knew we should have seen a lawyer then. Get it
set up right…but we are a family…you shouldn’t have to do that with a
family.”
I raised my voice.
“That is where you are dead wrong. A family is when you need these
contracts the most, not the least. In business everyone knows what it’s
about…making money with roles clearly defined. With family you have a
dozen agendas, lots of old feelings of rivalries and who hates Aunt
Martha and the like…and new wives and husbands and kids coming in to
upset old balances. With families a fight can destroy it…businesses are
used to fights. No, it is in a family that these contracts and
structures can make all the difference.”
“The difference?”
“The difference
between a family that works together or a family that self destructs due
to in fighting, false expectations, hurt feelings and splits that last
forever.”
I have sat in many
client meetings similar to that and heard, “but we’re a family” as an
excuse why families did not plan joint ownership with foresight and
clear expectations. Almost always the family is disrupted: occasionally
destroyed. And it all could have been prevented.
In the case above,
my client ended up paying his brother off and he and his sister
supported their mother until she died. It was a year before he would
talk to his brother again…shortly after his brother’s second divorce.
But the real
casualty was the mother who saw her children at odds over her own care
and died with that heartbreak.
But all that can be
avoided or, if there is a dispute, handled quickly, fairly and cheaply,
IF the proper planning in joint ownership of family property is achieved
with appropriate contracts and commitments made…in writing.
This article shall
discuss the basic issues to confront when a family considers owning
property together. It shall assume the reader has already read or will
read the articles on
Contracts,
Tenancy in
Common, Wills and Trusts,
Probate,
Partnerships,
Partition,
and
Limited Liability Entities. With those articles giving
the general law, this article will deal directly with the issue of
family ownership of properties.
THE BASIC TOOLS: GOOD
COMMUNICATION AND CHOICE OF STRUCTURES.
RULE
ONE: FAMILIES CHANGE AND NEEDS CHANGE
Ownership of
property is usually long term but dynamics within a family alter all the
time. Kids grow up and start businesses or jobs, have kids of their own,
get divorced, become disabled. As marriages occur, new people enter the
family with their own needs and expectations, often at variance with the
original family.
Such constant
changes mean that expectations that created the joint ownership can
alter over time as can needs. A child can lose his or her job or become
disabled and need to use the home. A parent can become ill and need to
sell the home. Another family member may want to borrow on the home.
Eventually, certain owners will die and their heirs will, instead, be
the new part owners which, again, can lead to confusion or dispute over
appropriate use of the property.
The solution is to
create a binding permanent structure so that all know what is expected
of them and what they need to do. Changes within the family will not
invalidate the structure that is well created.
RULE
TWO: COMMUNICATION AS TO EXPECTATIONS IS VITAL BEFORE TRANSFER OCCURS.
To create a joint
ownership without honestly realizing the fact of life that circumstances
and needs change and that people can change their minds as to what are
their goals is to court trouble down the road. Such issues must be
clearly stated and considered now.
Before transfer into
joint ownership is made, a full and frank discussion is vital to answer,
at a minimum, the following questions:
-
Who gets to live
in the home or the building? For rent?
-
Who, if anyone,
decides to borrow or sell on the home?
-
What criteria is
to be used to decide if someone’s need means that the property will
be pledged or sold?
-
Who pays
repairs? Maintenance? Mortgage? Does that increase rights to return
upon liquidation or death of the parent? If rented, who gets the
income? Who manages?
-
Do spouses or
children of the original owners get ownership? A place in the
decision making process? Even if a divorce occurs?
-
Why is the
transfer being made? Will it really save taxes or expenses in
probate? How much and how do you know?
-
What happens if
an owner dies? Divorces? Becomes disabled? Moves away? Files
bankruptcy? Gets into a bitter dispute with another owner? Fails to
make a contribution needed? Fails to treat the property correctly?
-
How will the
decisions above be memorialized in a binding understanding?
-
What tax
consequences may arise from the various structures?
-
How flexible in
use and terms can any arrangement be?
Remember, until the
transfer into joint interest is made, the original owner(s) have total
discretion to answer the questions above in any way she or he or they
wish…the moment more than one person is on the deed, that freedom of
action is gone. Once there are numerous owners decision making becomes
very complex.
RULE
THREE: PUT IT IN WRITING.
Verbal arrangements
are both hard to prove and often unenforceable as to real property. Thus
the answers to the above questions have to be reduced to a written
arrangement, either via a structure such as a Family Partnership
Agreement or a Limited Liability Company or Corporation.
It is also possible to create a written
Tenancy in Common
Agreement which has the owners own the property as tenants in common but
subject to terms and conditions of the agreement.
In short, once the
above questions are answered, they are reduced to either a structure or
a contract which is binding on the parties and fully understood from the
beginning. Any new person, whether a spouse or next generation, that
comes into the picture, will be bound to the provisions since the
structure or contract will be binding on that person as well.
The above solution
may not stop all arguments but it will stop needless and vicious
litigation and will stop the type of confused disagreements that can so
disrupt the family. Further, the rules are set and enforceable from the
beginning with no unpleasant “surprises.”
RULE
FOUR: CHOOSE THE RIGHT ARRANGEMENT AFTER GOOD LEGAL AND TAX ADVICE.
As seen above, there
are numerous ways that joint ownership of property within a family can
be structured and each has certain benefits and detriments from a legal
and tax point of view. Good planning will require input from a good and
experienced certified public accountant as well as an attorney. The
method should consider not only immediate tax questions (income and
property taxes) but the effect on estate taxes and one’s
probate.
Structural holding
of property
means that a new entity is set up to own all or part of the property and
the rules and obligations concerning the property are determined by the
structure and the documents created to set up the entity. The family
members own the structure which, in turn, owns the property. Rights and
obligations are defined both by the law of the entity and the provisions
as to the entity (such as buy and sell arrangements and rights to
contributions) that the attorney and family discuss and craft. Such
entities include Family Limited Partnerships; Limited Liability
Companies; Corporations; Partnerships, Tenancy in Common Agreements.
Contractual holding
of property
means that while ownership may be in the name of the individuals (such
as joint tenancy or tenancy in common) the parties execute a binding
written agreement which enforces the rules and obligations. This can
include such arrangements as the parent having certain expenses paid for
in return for obligating him or herself to pass the property to the next
generation; agreements to make specified provisions in inter vivos
trusts or wills; even leases between an entity and the parent.
Note that it is the
current owner of the property who can determine what the rules and
obligations will be and the structure to be imposed. The easiest time to
create such rules is before title is transferred to more than one person
since once transfer occurs, each and every owner must agree and if they
do not, then the various rules about partition or the limited liability
company already in existence will apply.
RULE
FIVE: DO NOT LET CURRENT GOOD FEELINGS MISLEAD YOU INTO THINKING THAT A
WRITTEN STRUCTURE OR AGREEMENT IS NOT NEEDED: IT ALWAYS IS.
People change.
Circumstances change. Needs change. If the family gets along and is
always in agreement, fine…you will not need to pull out the agreement
and enforce it. But if things change or there is conflict, you will be
delighted to you had the foresight to create an appropriate method of
quick, fair and inexpensive enforcement.
RULE
SIX: USE ARBITRATION AND MEDIATION TO RESOLVE THE DISPUTE.
As seen in our
article on
Arbitration and Mediation,
if the parties agree in writing, one can resolve disputes in the far
less formal and far less confrontational arena of mediation and
arbitration which is also far less expensive and time consuming than
litigation in a court of law. Families can be saved by avoiding that
intense adversarial system inherent in a court trial.
RULE
SEVEN: IT IS CHEAPER TO CREATE THE STRUCTURE THAN FIGHT OVER WHAT SHOULD
HAVE BEEN.
There is a very
understandable reluctance to spend money on lawyers and accountants when
everyone seems to be getting along and the cost of setting up the right
structure can take months of discussions and cost thousands of dollars.
Since families normally contribute to the legal and accounting fees,
there is always the danger that selection of the accountant or lawyer
will, itself, cause some tension or that some family members will not
pay their fair share.
But getting it done
ahead of time is akin to taking your car in for regular servicing or
getting your annual physical: the cost of failing to take preemptive and
intelligent care is to increase many times the ultimate expense. A
simple litigation involving property will take two to three years, cost
well over one hundred thousand dollars in fees and costs, and alienate
the family for years or forever. The cost of confronting the issues
before they escalate into conflicts and, instead, creating an
intelligent plan may be several thousand dollars-but is well worth the
cost.
As to whether it may
cause family tension to even begin the plan…well, if there is problem
creating the plan, imagine the chaos that would ensue if it becomes a
struggle without any plan at all. Better to know now that there will be
tension and create the structure accordingly.
CONCLUSION.
The wise family will
understand that careful advance planning is required and will avoid the
illusion that a happy family need not concern itself with the problem of
appropriate structuring of the co ownership of property. The best way to
enhance the family’s continued good relations is to work together to
make the right structure that can be both fair, flexible, and tax
efficient. There can be significant tax and estate planning advantages
in bringing the family onto title or ownership but to do it by simply
adding names to the title documents is to throw a die as to the future
of the family and the ultimate cost of the process.
A little planning
and expense now can do more than save time and money: it may save the
family. |
