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.”
“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 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.
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.