By Douglas K. Freeman, J.D., LL.M — Executive Vice President, Director of Consulting
Lee Hausner, Ph.D — Senior Vice President, Family Enterprise

For many wealth creators, the largest asset class in their net worth, or at least a very important part, is their real estate. The real estate can take many forms …

  • Real estate used in, and often leased to, the family business;
  • Investment real estate, including commercial and industrial rental properties, as well as single and multi-family dwellings.
  • Farm and ranch land, which sometimes doubles as a home as well as working land;
  • Personal residences; and
  • Vacation property.

It’s not unusual for these assets to represent 60% or more of the total estate and the values can range in the millions of dollars. As valuable as these properties may be, they also create some serious and difficult estate planning challenges. Most of these are surmountable, but only if identified early and planned well.

Forewarned is Forearmed

Here are some of the most important issues to think about and prepare for.

  • The more valuable the asset, the greater the potential estate tax. Will the cash be available to pay the tax? Can the property be refinanced? Will it have to be sold? Will the beneficiaries who inherit the real estate have other resources from which to pay the tax?
  • If the gift is to several beneficiaries who will share ownership, who will have the right to use it or responsibility to manage it? Will the person with responsibility also have the power to do so? Whenever there are assets with multiple owners (we call these “Shared Assets”), such questions can create disagreement amongst the multiple owners. Who decides if there are competing agendas or goals?
  • If the property generates income, how will it be allocated and shared? Who decides if, when, and to what extent income is distributed? Reinvested? Held in reserve for maintenance and improvements?
  • Who is responsible for paying the operating expenses and capital improvements? What happens if one or more of the family owners fails to do so?
  • Who pays for damages to the asset, especially if a family member was the cause of the damage? What are the consequences to the family member for failure to pay for the repair?
  • Who has the power to decide to sell the asset? Encumber the asset? What if there is disagreement among the shared owners?
  • What if an owner wants to sell his or her share? Is it permitted? Who sets the price and terms? Does the family want or will they accept a non-family buyer or transferee?
  • What if one or more current owners want to acquire the interest of others? Is that permitted? Who sets the price and terms?

A Suggestion for You

For these reasons, thoughtful families develop a comprehensive agreement amongst all the owners. We call this a Family Shared Asset Ownership Plan.

The Family Shared Asset Ownership Plan focuses on the long-range goals, dreams, needs and expectations of the family owners and other stakeholders, each of whom may have a current or future interest in the ownership, income, or use of the Shared Asset. If these voices are not heard, the family may experience anything from internal discord to public fighting and even litigation.

The Plan articulates the collective vision of these stakeholders, and establishes the process, policies, and procedures to be followed in the operation of the Shared Asset. It sets realistic expectations, defines responsibilities, and assures accountability. It does not, nor can it, assure the continued financial success or economic benefit of the Shared Asset. That achievement is, of course, the common goal of many of the stakeholders. But it will give those who chose to continue the Shared Asset the best chance to do so, while helping to reinforce the bonds of family and perpetuate the legacy of the wealth creator.

At First Foundation, we are concerned not just with the tax and economic consequences of wealth planning, but with the impact of that planning on the lives of those for whom the wealth was intended to benefit.

First Foundation, a comprehensive wealth management firm, provides investment management, wealth planning, consulting, trust and banking services.